Updated on 08.09.11

Reader Mailbag: Political Posturing

Trent Hamm

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. Why pay down 0% debt?
2. Retirement planning for highly compensated
3. Strategic foreclosure question
4. Fearing change
5. Heating and cooling
6. Investing without broker help
7. Small games for camping
8. Preparing for self-employment leap
9. Investing leftover money
10. Childhood toys

Since I live in central Iowa, regularly get involved with campaigns both locally and nationally, and sometimes switch my party affiliation based on which poltiical field I’m most passionate about, it’s not surprising that I’m being flooded with mail and phone calls from candidates who want me to participate in the Republican Straw Poll next weekend.

The Straw Poll, for those who are unaware, is an event hosted by the Iowa Republican Party where presidential candidates come and attempt to whip up support with an informal vote that’s supposed to give some sense as to what the field of candidates looks like. Mostly, it’s an afternoon of entertainment.

I really consider myself an independent, so I often change party affiliation based on which candidates I’m most interested in influencing the standing of. Since the 2012 election doesn’t have much going on with the Democrats… I’m a Republican, for now.

(I don’t know who I will vote for. That’s half the fun of going, though, isn’t it?)

Q1: Why pay down 0% debt?
Why would you ever make an extra payment on a 0% debt? Shouldn’t you always just put it into some sort of investment?

– Randall

The reason for making extra payments on a 0% debt is to free up your cash flow.

Even though the interest rate on a debt is 0%, making the minimum payment on that debt is still a monthly requirement. Month in and month out, you still have to make that payment. Paying it off eliminates that requirement.

Why not just invest it? For one, many people don’t have the self-control unless they have a goal that they’re saving for. If the money’s there without a purpose, why not spend it? For another, there are many situations where it’s better to not have savings, such as if you’re getting ready to apply for financial aid.

Q2: Retirement planning for highly compensated
I am 36, single, no kids, own my home and have two roommates who pay me rent. I earn $110K a year, and I max my 401(k) and Roth IRA. I have no debt except the mortgage (5.5%, 250K on it, last refinanced in 2004). My home is worth about $500K and I’ve owned it since 2001. I plan to stay indefinitely, both in the home and in the area, as my parents are nearby. My 401K has about $230K in it, and my Roth IRA has $29K. My take home pay is around $4300/monthly. I put $500 into my emergency fund monthly, and it has about 6 months of take home pay (around $24K). My job is quite stable. I also have a “new car fund” that I am putting $300 into monthly. My car, a 2007 Honda, is paid off, and I anticipate I will have enough to pay cash for the next car in about 6-8 years. I also tithe 10% to my church and other ministries.

I just received a letter from my employer saying that I am designated as a “highly compensated employee” (HCE) because my income was just over $110K in 2010. Because I am an HCE, I am now only allowed to contribute 10% of my gross income (about $11K), to my 401K, due to IRS regulations. I am livid! I have done some reading and understand these are the rules, but I think they are awful. I believe there are many others at my company who are in the same boat — $100K is probably the average for most at my company. I am a pretty small fish there and there are lots of folks that are above me. The company has about 20K employees.

What do I do? I am worried that I am not saving enough for retirement. I do receive a 10% employer match on my 401K, regardless of how much I put into it, and I know that’s quite good compared to other plans, and I am quite grateful for it. However, I would really like to be able to save the max of $16,500. Is $11K (my contribution) plus $11K (employer contribution) plus $5K (Roth IRA) enough? Am I worrying needlessly? Should I just not worry about it and take the $5K I would have put into my 401K and put it toward principal on the mortgage or home improvements? Or should I put it in a taxable index mutual fund, or something else? I realize I tend toward the hyper-saver mentality, so perhaps I am over thinking this, but I’d like your take. Thanks.
– Joanna

If you’re earning $110K and you’re contributing $11K (10%) yourself, plus your employer is matching $11K (another 10%), and you’re putting $5K into a Roth IRA (5%), that means you’re putting aside roughly 25% of your salary for retirement. That’s a lot, perhaps even bordering on excessive. You will have a bountiful retirement and should be able to walk out the door at the first possible date.

That being said, there is one alarm bell that’s going off here and that’s with your Roth IRA. If you’re earning $110K per year, you’re over the income cap for a Roth IRA. That means you can’t contribute the full amount to the account (you can, but you run into some messy IRS issues).

If you’re single and your income hits six digits, you should start contributing to a Traditional IRA instead. For single folks, you must be earning less than $105,000 to qualify for a full contribution and between $105,000 and $120,000 to be eligible for a partial contribution to your Roth IRA.

Q3: Strategic foreclosure question
I’m trying figure out what to do regarding my townhome (which is rented month-to-month) and my home. I’m frustrated that they are both so far under water and keep hearing about people that do a strategic foreclosure / short sale. I purchased my townhome in 2004 for $143,000, refinanced in 2007 for $184,000, now it is worth $150,000, and to break even on selling would need a purchase price of about $200,000. With the money from the refi and other savings we bought our home in late 2007 for $380,000, refinanced in 2009 to lower the rate only, currently owe about $295,000, now it is worth about $260,000, and would need to sell for $325,000 to break even.

My wife and I gross about $140,000 annually, have about $150,000 in retirement IRAs, and have $40,000 in an emergency fund. We’re in our mid-30’s. We don’t consider our current home our forever home and would gladly move if we could (we rushed into it and don’t like the location now). Also, our townhome rules only allow us to rent it for 3 years and that time is up in April. They could give us an extension or they could force the issue. We’ve been getting more and more frugal over the past 2 years. Currently we save about 20% of our income and the rental loses $500 per month. Other than the two mortgages, we only owe a $5,000 sewage assessment for our home which is at 0%.

How would a strategic foreclosure / short sale affect us? How bad and for how long would our credit be affected (we’re at about 780 – 800 right now)? Could the banks take our savings via a judgement or garner our wages? Are the rules any different for the townhome since money was taken out in a refi (even though it all went towards the next house)? If we cancelled our 20% savings, we could make both payments but that doesn’t seem like a good idea.

The other pertinent information is that we’re trying to have a child so our savings rate would go down in order to pay for those expenses when it happens. I don’t like the idea of a voluntary foreclosure / short sale at all, but I also don’t like being $500 in the hole each month on the rental and having over $100,000 negative equity. Today’s reality is much different than the original plan of renting the townhome for 3 years and then selling for a profit.
– Shane

The bank certainly could get that type of judgment if they decided to take you to court over it. However, that would require that the bank actually bother to take you to court over it and that they find a judge that’s sympathetic to their claims.

In many cases over the past few years, banks haven’t bothered to take the borrower to court because the costs of pursuing that action exceed their expected return on that action. Given that many courts are sympathetic to the mortgage holder, some of these suits end up returning virtually nothing to the banks.

Your biggest risk is probably to your credit, which will be hit hard by this. It appears as default on a very big loan, which does not have a good impact on your credit. However, this does go away over time. You are also running some risk of legal response from the mortgage holder, and there’s also the moral issue of walking away from an agreement both parties made in good faith.

Q4: Fearing change
I like my life. The only thing I don’t like about it is the financial hole I’ve dug for myself. I’m afraid that if I make changes to improve my finances, I won’t like my life any more. So I sit still and my finances get worse. How do I get out of this cycle?

– Amy

Start making changes and figure out how you feel about those changes on the whole. Try different things that are frugal and see if you actually enjoy them. Spend an afternoon or two doing something that reduces your cost of living, like air sealing your home or having a yard sale.

Some of them you’ll like. Some of them you won’t. If you don’t like it, skip it for now. The key is to get to a point where you’re spending less than you earn, and that doesn’t require doing every frugal thing that’s ever been invented.

What you’ll find is that it feels really good when that debt starts moving in the other direction. When that starts to happen, you’ll want to start trying more and more things to make that debt start moving faster and faster. That’s how it worked for me, anyway.

Q5: Heating and cooling
We live in a tri-level house and keep the temperature as low as possible in the winter and as high as possible in the summer. My husband has a home office in the lower level and it is quite a bit colder down there than it is in the middle and especially the upper level. Cost-wise, do you think it would make more sense to turn the heat up for the whole house, or keep the temp. about the same (or even lower) and use a space heater in the lower level, where he works during the day? During the day, we keep the temperature at about 65; at night it goes down to 58. I just don’t know how much more it would cost to run a space heater.

– Nancy

The best approach is always to run your central air conditioning and your furnace as little as possible. If you can take action so that you have to run those units less, you’re going to save money.

The scenario you describe is a cold-weather scenario. Using a space heater is a great technique for keeping a particular room warm while not running the central furnace for your home, which saves money on the whole. It’s a great move.

In the summer, I sometimes find it more cost-efficient to just work at the library or somewhere else on particularly hot days and let the air conditioner not run at all.

Q6: Investing without broker help
My husband is deploying this month and it looks like he will have quite a bit of downtime while overseas. He has set some goals for while he is gone – get in better shape physically, read a few books, and learn how to invest in the stock market. We are in great financial shape – no debt, maxing out retirement, 529 and IRAs set up, etc. He wants to take some money and start doing his own investing without help from a broker. So far he has been reading Stock Investing for Dummies, what other resources can you recommend? Especially blogs or online sources that he could use since he doesn’t want to haul a lot of books with him. Thanks!

– Abigail

There aren’t a lot of robust online sources for the type of information he’s seeking. Most online sources that discuss stock investing either use it as one sliver of a broader topic (like The Simple Dollar) or discuss it from a very deep perspective (like a stock investing blog). Neither one really matches what you’re looking for.

One good online learning resource is Investopedia’s Stock Basics site, which does a great job of laying out the basics of stock investing.

From there, I would honestly move to Wikipedia. Unlike the state it was in in 2003, most of Wikipedia’s articles are well-sourced and very reliable. Start with a particular area that interests you and move from article to article as you learn more about the topics you want to know.

Q7: Small games for camping
Do you take games along with you for camping trips? It seems to me that games with a small footprint would be great for camping. What do you think? Do you have any such games?

– Erik

I often pack small games for camping trips, just in case the weather is bad and we wind up sitting in a tent together.

A deck of ordinary playing cards is a must-have, simply because of the wide variety of games you can play with it. Other games I regularly take along while camping include a pocket chess set, Hive, Icehouse, No Thanks, and The Battle for Hill 218.

These have all been played on the floor of a tent on a rainy day, and a few have been played at a picnic table late in the evening, by lantern light.

Q8: Preparing for self-employment leap
I’m preparing for a significant life transition and am worried about being financial responsible during the process – I have plans to quit my full time job in August of this year and move from NYC to SC. I’ve been dating the same guy for 6 years and he joined the navy, and will be in training in SC for the next 2 years. He’s asked me to go with him. Since it’s been a long term goal of mine to eventually go freelance full time (I’m a writer/editor at a small magazine right now), and since he has volunteered to help cover costs while I get myself on my feet, these seemed like the perfect opportunity to do that.

Most of the advice out there says to have 3-6 months of expenses saved when you go freelance – but my expenses now are significantly more than they will be in SC (for example, my portion of my rent right now is 800 — that’s what it costs to rent an entire house in SC, and Stephen and I will likely be splitting that). The biggest expense I expect to have is my student loans; payment on those is about $500/mo. (that’s after consolidating my federal loans).

At least one writer whose blog I read suggested saving a significant amount and then inputting all freelance earnings into that account, then to “pay” yourself the same amount every month. That way you smooth out the ups and downs of freelancing–some months you make more than your “pay check amount” sometimes you make less, this way the months you make more pay for the months you make less.

I’d like to set up that type of system.

Since you have been in that place, where you’re leaving full time employment to work for yourself I thought I’d ask if you have any advice, financially, to make the transition a smooth one.
– Marcia

I agree wholeheartedly with having a large emergency fund before you make the leap into freelancing. You often have little idea how things will go after your first batch of clients and you may be facing some very lean months.

As for “paying yourself out of an account,” that works well if you’re paying yourself very small paychecks. The tricky part of freelance work is the income taxes, which you’re now completely responsible for. If you don’t have enough left over to pay the IRS, they won’t be happy.

The approach I use is to take every drop of income I have and split it in half. I put half in my personal account and half in a “tax” account. I then pay all of my income tax and other taxes from the “tax” account. When I need to pay a tax bill, the money comes out of my tax account. At the end of the year, after all taxes are paid, I move any and all leftovers from that year back into my main account (a end-of-year bonus, if you will). This helps me make sure I don’t miss a single tax bill.

Q9: Investing leftover money
Twelve years ago, I was working 3 different part-time jobs just to keep my head above water, a roof over our heads and food on the table. Today, I am living proof that you can come back from such a situation and am in a much more stable position, thank the Lord! Having been an avid reader of your blog for a couple of years now and having taken the Financial Peace class you would think that I know the answer to this question already, but I find myself wishing someone would confirm this decision. Here’s my pleasant situation: I have a 4 months emergency fund built up, plus an equal amount saved up for a new vehicle when that time comes (probably another 4 years or so) and I plan to contribute the full amount allowed to a Roth IRA this year again. The question is what is the best investment for any remaining “extra” funds I have this year – investing in mutual funds, cds, etc. or simply paying extra principal on my mortgage? The interest rate on the mortgage is just over 4%, but it doesn’t seem that anything else has even that much value right now

– Pam

I’d dump it into the mortgage, to be honest. I wouldn’t invest it in the stock market unless you have a specific long-term goal that’s more than ten years out – it’s too volatile otherwise. No other investments offer even a remotely reliable average annual return that beats your mortgage right now.

Putting it into your mortgage locks in a return of just over 4% per year for you with a balance that’s paid out when your mortgage is paid off early. That’s one of the better investments available to you, plus when you pay it off, you drastically improve your monthly cash flow.

This is the way I would go.

Q10: Childhood toys
When you moved out from your parents’ home, what did you do with your childhood toys? Did you keep them? Did they ever get thrown out?

– Ed

My parents kept some of my childhood toys and got rid of some of the other ones. Many of my old toys remain in tubs in the upstairs of their home, and now my children play with them when they visit Grandma and Grandpa.

I don’t think there’s any best way to handle this situation. My parents wanted me to deal with the toys at various points, but I usually just suggested that they toss them save a small number for future grandchildren to play with. I’m pretty sure they eliminated some of them over the years.

It worked for us, though some day I will have to deal with them.

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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  1. Josh says:

    @Q2: Joana is eligible to contribute to the Roth IRA. The $105k limit is on modified adjusted gross income, and since the 401(k) contribution is subtracted from the $110k to get MAGI, there are no eligibility issues here.

  2. Johanna says:

    Q3, Shane: You should talk to a lawyer about your questions. Find one who is familiar with the real estate laws in your state. Strategic foreclosure may be a good option for you, but it’s a big deal, and it is not something that you should decide based on the opinions of a bunch of schmoes on the internet.

  3. Liz says:

    Q6: If your husband is military (I’m assuming yes, but…), he has access to USAA for insurance, banking, and investment information. It’s a great resource.

  4. Steven says:

    You know, Trent, there are more than two political parties in this country…

  5. Missy says:

    I would suggest going through the toys and checking ebay to see if any of them are worth anything. For example old Star Wars toys can be worth a lot. I still had my old toys and sold my set of Raggedy Ann and Andy dolls for over $600 and they went to live in Japan. You just never know.

  6. valleycat1 says:

    #5 – The best way to figure out whether the space heater is the better choice is to get one, try it for one cycle of your utility bill, and compare the bill to a comparable cycle where you used the central heat. And, get a small space heater that warms your husband & his immediate work area – you don’t have to warm the entire office space unless he’s seeing clients there.

    If Trent is going to the library when it’s really hot, I hope he isn’t turning off the AC and then turning it back on when he returns to cool down the house. It would be better to set it higher but not too far off the usual range you keep it in. Otherwise it will run full bore for a long time when the house has gotten really hot, to cool it down to the set temp. Although I guess there could be some cost savings if your area has extremely high utility costs during peak hours.

  7. Johanna says:

    Q2: “That’s a lot, perhaps even bordering on excessive. You will have a bountiful retirement and should be able to walk out the door at the first possible date.”

    Unfortunately, this is not necessarily true. Your fellow Republicans are making it clear that people Joanna’s age (and your age and my age) cannot count on Social Security and Medicare to be there for them in anything like their present forms.

    And maybe Joanna *wants* a bountiful retirement. When I look at people I know who are experiencing bountiful retirements now, it looks pretty good to me, and it’s a perfectly fine goal to have if it’s within your reach. Or maybe she just wants to maximize her chances of being able to retire at 60-65, instead of 75-80 like you’re telling people to do.

    Or maybe she wants to maximize her retirement savings now so she can afford to save less later. We don’t know.

    Anyway, to answer Joanna’s question: Any of the options she suggests would work to help her build wealth outside of her retirement accounts. I’d be careful about the home improvements, though. If they’re necessary improvements (such as fixing things when they break), that’s one thing. Or if they’re improvements that you want to make for your own enjoyment, to make the house nicer for you to live in, that’s also a good goal. But upgrading things for the sake of upgrading them, because you think they’ll increase the value of your home, is not necessarily a good idea.

  8. tentaculistic says:

    I am just waiting for the political flaming to begin… although the first 7 comments were unrelated, so maybe I am expecting too much hysteria from TSD readers?…

  9. Tom says:

    It’s good to have no savings for for college so you can take out student loans?

  10. Eden says:

    Q3: I agree with Johanna, speak with a lawyer and possibly a tax accountant about the legal and tax impact of a strategic foreclosure or other options.

    Also, I disagree with the statement that this is a “moral choice”. A mortgage is a legal document, with clearly spelled out options for each party involved. If you stop paying, they can seize the asset involved and possibly more. The reality of the situation is that most of us didn’t make a promise to a close friend, but signed legal contracts with corporations. These corporations are not people and themselves do not treat mortgages or other documents as promises or “moral obligations”, but rather as legal contracts. When the contract doesn’t suite their interests, they choose the least expensive exit strategy, which is often to stop payment and allow foreclosure.

    Attempting to shame someone who is considering what might be a wise financial strategy by implying that it is a moral issue when the party on the other side of the deal would never treat it as a moral issue is damaging to your readers.

  11. lurker carl says:

    Q5 – If the three levels of your home have noticably different temperatures, there are issues with inadequate or defective insulation, excessive air infiltration and/or the HVAC systems. Schedule an energy audit to pinpoint the problems.

    Trent wants this blog to remain politically neutral but will often bring politics into his musings. What’s up with that?

  12. marta says:

    “Trent wants this blog to remain politically neutral but will often bring politics into his musings. What’s up with that?”

    Exactly my thoughts.

    Bored now.

  13. Ginger says:

    For question two I would start putting some money aside in taxable account, in the stock market. I would take that $5000 minus taxes that you would put in your 401k it a vanguard taxable account and let it grow. You are the type of person who should have a taxable account.

  14. Jackowick says:

    Trent is not being political, he’s talking about politics. There is a difference. He’s also filling you in one some slice of life background info (does it help me with my mortgage to know what board game he played last night? Nope. But it adds color).

    Registering for a party gives you a chance to influence the final candidate. I registered between different parties depending on the year (especially when a sitting President/Governor is going to re-run; I’d rather help by picking the opposition so WE, yes WE all have better choices).

    There is a lot more bitter angry posting here recently. It’s distracting.

    Politics do play a role in our financial decisions, we cannot fully exclude it from the discussion, but we can control how we include it.

  15. Johanna says:

    @marta, @lurker carl: I think Trent views politics as a game, with his talk of “an afternoon of entertainment” and his disdain for anyone who actually feels strongly about anything. He doesn’t seem to get that the things our elected leaders do actually have an effect on real people’s lives.

    (On the plus side, though, if he ever decides to go into politics himself, he’ll fit right in.)


    The Republicans are late to the party.
    Anyone with a couple brain cells has recognized for many years that Social Security and Medicare are government enforced Ponzi schemes. Of course people 45 and under are going to get hosed in terms of Social Security. They will be fortunate to get back their contributions (never mind the 40+ years of interest it should have earned)

  17. Maureen says:

    Q4: Amy, Do you like looking at your credit card statements each month? How does that make you feel? Do you think being free of that burden would feel better or worse to you? Do you like your life because you’ve filled it up with stuff? Are you using money and the things you purchase to substitute for something else that’s missing? If I was working with you I would really be pushing you to get clear on this issue because I don’t understand how you can possible “like” credit card debt or being in a financial hole and the two really can’t be separated.

    I implore you to get off the dime and start facing your “fear” and do something before you are in such a hole it will take years and years to get you out of it! No one can sustain living above their means forever.

    Remember, fear is never the truth about anything, it’s just an emotion.

    I personally believe you are going to have to do things that you might not like, but that’s the name of the game.

    I had to change my shopping habits dramatically when I was facing bankruptcy (which by the way I never filed). Instead I paid off the debt and live debt free now with the exception of my mortgage. It’s tough, but you can do it if you are serious about changing your financial situation! Good luck!

  18. Dan says:

    I think it is very helpful when a writer provides a little bit of info about their political beliefs. You can usually tell a lot about someones political view point just by the way that someone writes about finances, but it is always nice to get confirmation of your assumptions.

    Trent likes to paint him self as independent, but he is much more liberal than he might be willing to admit. However his sense of self responsibility is very conservative.

  19. Jonathan says:

    “Attempting to shame someone who is considering what might be a wise financial strategy by implying that it is a moral issue when the party on the other side of the deal would never treat it as a moral issue is damaging to your readers.”

    Just because you feel that not following through on an obligation is a not moral issue does not mean that Trent’s belief is damaging to his readers. I happen to agree with Trent regarding this. If I borrow money from someone (or some corporation), I believe I am morally obligated to pay back the amount I borrowed, plus the agreed upon interest. I feel that too many people try to find ways to justify such decisions so they don’t feel guilty. It seems that when the other party is a corporation it is much easier for people to justify not living up to their end of the agreement.

    While Webster’s does not define a contract as a promise, it gives the word “covenant” as a synonym, which is defined as “a written agreement or promise usually under seal between two or more parties especially for the performance of some action”. I’m not suggesting that it is wrong to believe breaking a contract is not a moral issue. I am, however, suggesting that each individual should make that determination for him/herself.

    Defaulting on a loan impacts more than just the lender holding the loan. The higher rate of default, the higher interest rates will be or the harder it will become to get a loan (assuming, of course, that the government or Fed isn’t working to keep loans more available than the market otherwise would, which is presently the case).

  20. DOT says:

    Q2 – Horrible statement Trent. 25% savings rate is not excessive by any means. Personally, I think 30 – 40% is more adaquate.
    Although, married, my husband and I have a combined income of upper 100’s and have always saved a large percentage for early retirement (35% +/-)and have been living a very nice life while saving. He retired last year at 56 and I will retire in just shy of 5 years at age 55.Not everyone has a desire to work until they are 80 like you… No thank you…if I am working for money when I am 80 it will be because I WANT to not because I still need to fund a retirement account.

  21. Kathy F says:

    Q2 states: “I just received a letter from my employer saying that I am designated as a “highly compensated employee” (HCE) because my income was just over $110K in 2010. Because I am an HCE, I am now only allowed to contribute 10% of my gross income (about $11K), to my 401K, due to IRS regulations.”

    I was not aware of any IRS regulations that limits 401K regulations for “HCE” who earn over $110K. If so, this would affect me as well. I have been contributing the max $$16500 plus $5500 catch-up contributions because I am over 50. Is something going on that I should be more aware?

  22. Adam P says:

    DOT – some people like to spend money while they are young and healthy, and strike a balance. 25% can be excessive for saving if you are depriving yourself overly in the present.

    Clearly, for 2 people sharing fixed expenses and “upper 100s” of income you can save 35+% and still live a very fun life spending on things you enjoy too.

    But for a lot of other people, say, a single person earning less than “upper 100s”, 25% gross savings for retirement may be plenty bordering on excessive. Especially if they have some expensive hobbies or interests.

    I would hate to be the one who deprived myself my whole life to retire at 55 then become unhealthy (or worse, die) at 56. Better to balance it out.

  23. DOT says:

    I am not fully educated on the issue any longer since I left the banking industry 10 years ago ( high percentage of employees made over 110K)…but labeling someone making over 110K as a HCE has to do with the percentage of employees making over 110K a company has. Companies who are not over this percentage threshold do not have to label any one making over 110K as a HCA…. so not everyone making 110K is considered a HCA. It depends on the company you work for.

  24. jackie says:

    Yahtzee is great for camping. Small and fun for all ages.

  25. DOT says:

    I have never deprived myself. I live a VERY rich happy and balanced life.
    I fully think a single person making over 110K could save 25-35% of their gross and do the same if they so choose, even with an expensive hobby.
    I still stand behind my comment that telling someone who appears to be finacially educated and content that their savings rate of 25% is excessive is a horrible statement.

  26. Katie says:

    He didn’t say it is excessive though – just that it’s “possibly bordering on excessive.” She can decide for herself whether that’s true or not.

  27. marta says:

    DOT, I think you misunderstood Adam P’s comment. He said it would be harder for someone making LESS than upper 100s to save at the rate you did without some sacrifices.

  28. DOT says:

    I apoligize.. I should have said, “I still stand behind my comment that telling someone who appears to be finacially educated and content that their savings rate of 25% is possibly bordering on excessive is a horrible statement”.

  29. jim says:

    Q2 Joanna : 25% is plenty adequate for retirement savings so you don’t need to be worrying about that. Using your extra money to pay down the mortgage would be fine.

    Q6 Abigail : I would recommend starting out slow with a smaller amount of money. You don’t want to risk a lot of money on rookie mistakes. You could also try out investing for practice with a website like Updown. At Updown you can practice investing with pretend money. It will help get a hang of how your investing choices might turn out without risking real money.

  30. lurker carl says:

    “I would hate to be the one who deprived myself my whole life to retire at 55 then become unhealthy (or worse, die) at 56.”

    Low wage earners should know better than to pursue hobbies and interest they can’t afford. I’d hate to be the one who dies young and leaves my family impoverished because I didn’t want to ‘deprive’ myself.

    No one complains when they have too much money in retirement. On the other hand, plenty of retirees complain if there isn’t enough. I prefer to be in the group that saves too much, the excess cash will pay for excellent medical care.

  31. Jonathan says:

    @lurker carl (#30) – Just for the sake of clarification, are you saying that someone making $110k is a low wage earner?

  32. Johanna says:

    @Katie: It’s hard to argue with “possibly bordering on excessive,” considering how much we don’t know about Joanna’s situation. (When does she want to retire? What kind of retirement does she want? Is she depriving herself of things she wants now, or not? Does she plan to save this much for retirement for her whole working life, or is she planning to cut back on contributions at some point?) But I think the likelihood that it actually *is* excessive is pretty small.

    If you run the numbers on a retirement calculator, assuming (1) no Social Security benefits, (2) a 6.5% yearly return before retirement (Warren Buffett’s predicted 7% return for stocks, minus a bit to account for non-stock investments in your portfolio) and something less than that after, (3) a reasonable retirement age and reasonably long lifespan, and (4) no decline in expenses in retirement, you find that saving 25% really does not get you that far. It’ll keep you from having to eat cat food, certainly, but if you actually want to keep your standard of living constant over your whole life, it is not excessive. In fact, it might not be enough.

  33. Jonathan says:

    @Johanna (#32) – I’m not questioning your info, because you always seem to be very knowledgeable regarding these things, but could you provide some details? I ran a calculation based on saving 25% of $110k for 20 years and what I came up with indicated that Joanna could retire at 56, drawing enough off of her investments to live more comfortably than she currently is, and still leave close to a million dollar inheritance. Maybe I missed some variable in my calculation?

  34. Maureen says:

    Q8: The act of paying yourself first is an important one. Here’s why: If you put off paying yourself first you’re telling the cosmos that you’re not valuable. Once you begin to honor your gifts and talents by paying yourself you’re going to feel valued and you’ll feel an increase sense of self respect and self-worth. Trust me, that feeling will end up translating to more confidence in your marketing and the type of clients you attract.

    Second reason: It doesn’t matter at first how much you pay yourself. What matters is the action of the ritual. Choose an amount and schedule you can stick to. Don’t make paying yourself contingent on getting a new client. If you do, you’ll end up perpetuating a feeling of having to wait when thinking about money.

    To be self employed I feel you need more than 3-6 months in an emergency fund. It’s just not enough. I encourage my clients to have anywhere from 6-18 months depending upon individual circumstances. Trent is right, make sure you have what you need to pay the IRS. Best of luck!

  35. Katie says:

    I don’t really know or care whether it’s enough money; I just thought it was relevant that Trent didn’t say it was excessive without a caveat. Sorry, it’s the lawyer in me.

  36. Tamara says:

    Jonathan @ #19:

    “Defaulting on a loan impacts more than just the lender holding the loan. The higher rate of default, the higher interest rates will be or the harder it will become to get a loan (assuming, of course, that the government or Fed isn’t working to keep loans more available than the market otherwise would, which is presently the case).”

    QFT. People defaulting allows banks to justify their crazy interest rates & other policies…they can say they have to account for all these charge-offs by sticking it to the rest of us.

    10 years ago I worked for a major credit card issuer in the collections department. We charged a $15 (!) fee to make a payment over the phone. Management called me & some other folks in to come up with ideas on how to charge the fee more often since we were waiving it 90% of the time. My suggestion was to throw the associate a small percentage of the fee, like 25 cents, for each fee they charged. Their answer: “no, because these fees are covering lost profits elsewhere”. So, the people who were trying to make good on their debts despite slipping up were screwed even harder. You better believe I kept waiving that fee whenever the customer objected even /slightly/. I felt dirty about charging it!

    Anyway I was unemployed for 8 months, my interest went up to 30% & though I could have walked away my experience on ‘the other side’ so to speak taught me a lot & convinced me to be responsible & pay it rather than walk away. Credit counseling for. the. win.

  37. Tom says:

    Also, I disagree with the statement that this is a “moral choice”. A mortgage is a legal document, with clearly spelled out options for each party involved.

    I think strategic default is more amoral than immoral. You’re indifferent towards the moral effects of voluntarily entering foreclosure rather than actively promoting it. Let’s be honest, strategic default makes perfect legal and fiscal sense when the bank decides not to seek recourse. If we lived in a society where you were likely to be sued for breaking the mortgage contract, people wouldn’t do it.
    Researchers are finding out that a lot of people don’t feel as bad as we thought they would about walking away from mortgages. I don’t remember the guy’s name, but there’s a professor at the University of Arizona with a lot of recent publications regarding strategic default and the surprising numbers of foreclosures, in part because banks assumed people would default on unsecured credit and car loans before their homes.

  38. Johanna says:

    @Jonathan: Are you accounting for inflation? That’s the only other thing I can think of that you might be missing.

    I’m using the MSN Retirement Calculator (I’ll let you google it). Based on the numbers Joanna gave, and the assumptions I listed (plus 3% annual inflation), it’s telling me that if she retires at 60, her money will only last until she’s 81. But it’s possible that I’ve missed something too.

  39. jim says:

    I ran similar quick calc about Joanna’s savings that Jonathan did. Joanna has $259k in retirement now. If she continues to save about 25% of her 6 figure income and gets 6% average growth then she should have over $2M by age 55. That should be enough to retire early and support her current lifestyle considering that she is currently living off only around $45k or less. Plus by then her house could likely be paid off which would cut her expenses a lot.

    25% retirement savings is plenty. Realistically.

  40. Jonathan says:

    Johanna, you’re right. I wasn’t taking inflation into account.

  41. jim says:

    Johanna, The MSN retirement calculator assumes as a default that you want retirement income equal to 75% of your current income. But Joanna is currently living off of less than 45% of her income so she doesn’t need to replace 75% of $110k. Especially considering that she’s saving about 30% of her income. The MSN calculator is also probably assuming a pretty conservative margin of error about how the investments will perform after retirement and assuming that you’ll keep all the money in a retirement account and draw down some %. However you could instead take your $2M at age 55 and put a large portion of it into a lifetime guaranteed annuity and ensure the bulk of your retirement income for life.

  42. Johanna says:

    @jim: In 20 years, you’ll need about $80K to buy what $45K buys today. $80K/year from a $2M nest egg is a 4% annual withdrawal – *but* most of that $2M is pre-tax money, which means she’ll need to pay income taxes on the withdrawals. So she’ll have considerably less than $80K to live on.

    Plus, I assume that her health insurance premium is a pre-tax deduction, so it’s not part of the $45K. If Medicare goes away (or is replaced by a “voucher” that’s inadequate to cover the actual cost of insurance on the private market), who knows how much she’ll have to pay for healthcare.

    This is the reality of life without Social Security and Medicare, folks.

  43. Johanna says:

    (And of course, if she really does retire at 55, she’ll be paying for her own health insurance for at least 10 years regardless of what happens to Medicare.)

  44. Maria says:

    Adam P #22
    Personally, I would hate to be the fool who needed to / planned to work until I was 80 and then croaked at 75.
    Having to work full time until you are 80 is
    certainly depriving oneself of many of life’s benefits.

  45. Johanna says:

    @jim: If a 55-year-old wants to buy an annuity that will provide the bulk of their income for life, they’re going to want an inflation-protected annuity. I don’t know much about those, but they’ve got to be more expensive than a standard annuity, even more so when you’re looking at a longer expected term.

  46. DOT says:

    Life without social security wouldn’t be the end of the world.
    I have said it before.. If I had the 6.5% my employer was required to pay to SS and the 4.5% I am required to pay, I could certainly save and invest it far better than Uncle Sam.
    If I were still in my 30’s I would certainly give up any claim to SS and be responsible for funding my own retirement in full if I had 11% more income.

  47. jim says:

    Johanna, I was taking inflation into account. Today $1.6M would buy you $100k in lifetime annuity income at age 55. That will be enough to keep a single woman from not having to eat cat food even 20 years from now. Health care costs DO add an extra unknown variable to the equation thats true. Her taxes wouldn’t be that high. Figure part of her income is tax free roth, ajust for inflation and then her IRS tax would be Plus her house should be paid off around that time too whichc would considerably cut her expenses. Medical costs are a big variable that could throw any early retirement plan out of whack.

    I think we’re splitting hairs. You can make all sorts of assumptions or guesses about this stuff. Theres no single right answer, just a giant pile of assumptions and variables we could alter anyway we want. No reason to assume she’d want to retire at 55 anyway..

  48. Johanna says:

    @jim: But does that $100K payout increase each year with inflation? (That’s what I mean by “inflation protected.”) If not, then by the time she’s 95, she’ll be living on less than $20K/year in today’s dollars. That’s not splitting hairs.

  49. jim says:

    Johanna, From what I’ve seen inflation protected annuities cost around 33% more up front give or take. $1.6M would get you $100k for life at age 55 and it will get you about $75k lifetime income with inflation adjustments. And yes you’re right some inflation adjusted would be a good idea. You don’t need to guarantee 100% of your desired income. Personally I’d probably get an annuity to guarantee a basic amount of expensees and then keep the remainder in the retirement accounts so you can use it if/when you desire if needed.

  50. jim says:

    And this all assumes that social security will be abolished in 2 decades, that she wants to retire 10 years early, that she lives 15-20 years past average life expectancy and that her retirement funds will have a very weak growth rate compared to historic standards. You really have to stack the deck against her almost every way possible to make it so she runs out of money.

  51. jim says:

    If you use the MSN calculator and assume she works to age 60, add social security, expect that her investments grow at an 8% rate then she could have $9.7M in the bank at age 100.

  52. valleycat1 says:

    Iowa Straw Poll – per the NYT, “The candidates who [paid for a spot and] intend to participate are Ron Paul, Michele Bachmann, Herman Cain, Rick Santorum, Tim Pawlenty and Thaddeus McCotter.” I don’t think the next Republican candidate is in this group. And Trent has already said he switches parties all the time. So, yeah, yawn.

  53. Johanna says:

    @jim: First of all, I’d argue that an important part of any responsible financial planning is taking a good look at the worst-case scenario and preparing for it as best you can – not just running the numbers for a middling-to-optimistic scenario and going “Eh, you’ll be fine.” I’d rather assume 6% returns and get 8% returns than vice-versa.

    Second, I don’t think the worst-case assumptions we’ve been talking about are all that unrealistic. I didn’t make up the 7% returns number, Warren Buffett did, and based on what little I know about price-to-earnings ratios, I see his point. I don’t think it makes much sense to predict what the stock market will do solely based on historical returns. Past performance, future results, and all that.

    On Social Security: Trent has written in the past about not relying on Social Security. His fellow Republicans are making some very loud noises about their desire to dismantle Social Security and Medicare, and how they’re “putting people on notice” that they need to save more for their own futures. All the talk you hear on the news about “cutting government spending” and “entitlement reform” and “shared sacrifice” translates into “You need to save more for retirement. Yes, person-under-age-55, this means you.” I really hope that their plans don’t come to fruition (not so much for my sake as for the sakes of all the people who are less well off than me), but if they do, this is what “saving more” looks like. How many of us are getting the message?

    As for retiring at 55: Look at all the people in their 50s who are involuntarily retired – they got laid off, and realistically probably won’t ever find another job. They don’t seem to be getting much sympathy. Everyone is all, “You should have planned ahead.” Well, this is what planning ahead looks like.

  54. lurker carl says:

    #31 Jonathan – Compared to mean earnings, no. Any salary is too low if every dollar is spent to keep from feeling deprived. Salary and wealth are unrelated unless a considerable percentage of every paycheck is saved for the distant future.

  55. Jeremy says:

    Q3 — If you’re living in a recourse state, the bank will absolutely sue you for the deficiency in a strategic foreclosure. Especially since you have substantial income.

    This notion that banks don’t sue for deficiencies is an internet myth. In states where banks are permitted to, they sue as a matter of course. I can show you hundreds of cases from here in Missouri (where I am an attorney), in which banks sue for deficiencies on foreclosures.

    Credit card companies routinely sue for $1,500. A bank is going to sue for $150,000 deficiency on a foreclosure, particularly when the owners are making $140,000/yr.

  56. Jeremy says:

    Q3 (continued), also, the bank doesn’t need a “sympathetic” judge. All they need is a judge who can read a promissory note, and subtract the amount garnered at the foreclosure sale from the amount the couple agreed to pay.

    A case like that won’t even go as far as a trial–the judge will decide it on a summary judgment, when the bank presents a copy of the note, evidence of default, the paperwork from the foreclosure, and an affidavit from the custodian of records that the copies of those documents are true and correct.

  57. kristine says:

    “However his sense of self responsibility is very conservative.”

    This is why the answer to Q1 surprised me so much. He is noting the benefit of forgoing savings, even if you have the money to save, in an effort to game the system into thinking they cannot pay as much for college, and get me and mine (via gov) to help foot more of the the bill or loan him more money as financial aid.

    It is taking advantage of a gov entitlement in an semi-dishonest and self-entitled way. Yes, I know most people do it, as it is logical, but I did not expect this from someone who touts personal responsibility, and in the same blog insinuates that walking away form a mortgage is less than moral.

  58. SwingCheese says:

    My husband and I also like to take dice camping. With 6 dice (die? I’m not sure what the proper plural is) we have played 10000 by campfire at the end of the day. It is a game that is fun and easily accessible to anyone from about age 5 on up.

  59. Malcolm says:

    Q3 – I agree with #2 and #10. Q3-Johanna should consult with a real estate attorney and tax adviser, and also consider this a business decision. A properly-drafted short-sale agreement would prevent any deficiency from the short sale to follow as a personal debt. As a suggestion, they could move back into the townhouse after the short sale. Downsizing is often a good thing, not a bad thing.

  60. Annie says:

    I think Joanna’s contributions to her 401K is great. I am just surprised that it cuts you off at 11K a year. I thought it was 16,500 maximum for everyone. I probably don’t have the knowledge about retirement like you folks out there.
    If i had the extra money i would pay down my mortgage and invest in another house and rent this one out. You are in a great position to really do well and retire at a young age. Not many people are blessed this way. One thing i was curious about though is why they consider over 100K highly compensated. I guess becasue my background is in healthcare, i see a lot of nurses making over 100K with experience, First Assistants, surgeons, they make more, more, more….it just sounds strange. To me highly compensated is someone making over 500K a year like a CEO or Physician………

  61. Josh says:


    All of your Republican bashing and welfare state grandstanding aside, you should be aware that without meaningful reforms of both Social Security and Medicare, there will come a point at which both of those programs will have to be gutted.

    Ignoring the fiscal reality of the situation puts these programs in danger. You and your fellow Democrats would do well to remember that.

  62. Finance Nerd says:

    @#21, #23 and #59 —
    The HCE rules are employer dependent, meaning that $110K in one company may make you subject to the rules, and $110K at another company may not. The limit is the same, but the application is different.

    The rules are there to prevent companies from using 401(k) plans to “unjustly enrich” those making a lot of money, and they relate to the average participation rates of people above and below the $110k cap. For example if the average person above $110K put in 8% of their income and the average person under $110K put in 2%, the plan would be considered top heavy, and the HCE rules would apply. The exact details of what constitutes top heavy are complex and not worth getting into here.

    But, there is an out — a safe harbor for companies that vest employer matches quickly enough (I believe the max is 2 years) and do other specified things — these companies are NOT subject to the HCE rules.

    In all cases, it is up to the company, not the employee to know and follow these rules. If you are subject to them, they have to tell you, it is not your responsibility to figure them out. So, it is unlikely you have been doing something wrong for several years without knowing it.

    That said, there is a small risk that you become an HCE after the fact (e.g. a large raise in one year) which may mean you now have a lower cap. For example, you make $108K and are not subject to the cap, and you get a $10K bonus in December, and now you are over the cap is subject to a lower max contribution. This happened to me once, and I was able to recoup all of the amounts that I had put in in excess of the cap. Basically they unwound the excess contributions and gave them back to me.

  63. Finance Nerd says:

    One correction — the top heavy rules are based on a percentage of plan assets, not contribution percentage.

    Here is one link to a short explanation:

    Or you can google “top heavy plan rules” for more details.

  64. TheBudgeteer says:

    Q4: Amy, It’s easy to sit around imagining all the potential hardships that MAY happen when you become frugal. The reality is going to surprise you in many ways that are entirely pleasant and rewarding. Focus on the positives and give yourself some credit when you succeed. For instance, fast food is a budget buster for many people. Changing the situation requires learning some smart shopping techniques and a few simple cooking skills. In this situation, some people will throw up their hands and say, “It’s too hard,” and make a run for the drive-through window. The fun part of being frugal is being able to look back at the end of the month and say, “I saved $800 this month by avoiding fast food AND I learned how to cook two really tasty new recipes AND I lost 5 pounds.”

  65. Annie says:

    I would be interested in knowing what kind of financial hole you have dug for yourself. If you don’t want to give up using your credit cards, then i seriously think you should get counseling because you are affording things you can’t really afford. Your situation will never change and you will always look to borrow money. If it’s other kinds of debt like student loans,etc.. why not work harder to find a good paying job and then not worry about enjoying your spending habits. Making changes to improve your finances should be a welcoming event, you should’t feel like you are going to miss out on a lot, still find ways to enjoy yourself. Department stores are always going to have sales/clearances… cars will always be around you can by pre-owned, homes they are always building new, if you like to travel and explore there are inexpensive ways of doing it or save money to do it. have fun with your life, don’t make it a bad thing to improve your finances.

  66. jim says:

    Johanna, I understand being conservative. I undersstand that realistically any of the things your talking about could possibly happen.

    But its not at all likely that all those bad things will happen together to one person. There is nothing wrong with saving >25% of your money if you want to of course. But people should not feel that if they don’t save >25% then they are doomed to eat cat food in an alley someday. Thats far too pessimistic.

    If you’re super paranoid then just put your money in safe bonds. Even at 4% return saving 25% of $110k would net Joanna around $1.6M by age 55 which would be certainly enough to live off of even with inflation.

  67. jim says:

    Josh, “you should be aware that without meaningful reforms of both Social Security and Medicare, there will come a point at which both of those programs will have to be gutted.”

    If they do nothing whatsoever to Social Security then it will still be able to pay out about 70% of benefits. So worst case they’ll have to cut benefits 70%. Thats pretty bad for people getting SS of course. Only a few changes would keep social security solvent and able to pay benefits in full forever. They could raise the retirement age a few years, raise the tax rate a little or reduce benefits for higher income people. Or any combination of those or other changes would work.

    Medicare is a lot worse shape due to the inflation of healthcare. I don’t see any easy fixes there.

  68. Josh says:


    You’re right about SS. Personally, I would like to see an increase in the retirement age, indexing it to life expectancy, means testing, and COLA’s indexed to prices as opposed to wages. Doing this soon would make SS solvent for a longer timeframe than was accomplished by the Greenspan commission.

    There are no easy fixes for Medicare, but recently passed legislation will make things worse, not better.

  69. Katie says:

    I’ve always wondered, is the cat food analogy chosen for maximum horror or does it really happen? I wouldn’t think cat food would be that much cheaper than bulk beans and rice, and old people are eligible for food pantries right? What about food stamps?

  70. Johanna says:

    @Katie: I don’t know the answer to your questions. But to be able to eat cheaply on bulk beans and rice, you need to be able to get to a place that sells bulk beans and rice, and get your heavy bags of beans and rice home with you. That’s not a trivial task for an elderly person who either can no longer drive or can’t afford a car. You also need to have a stove that works, and a place to store your bulk beans and rice that’s safe from bugs and mice (and even human thieves). Basically, “let them eat beans and rice” implies a whole lot of privilege that most of us take for granted, but not everyone has.

  71. Katie says:

    No, no, I’m not saying “let them eat beans and rice,” nor do I support cutting social programs. I’m actually just wondering if it’s a widespread phenomenon – it’s purely a factual question.

  72. Johanna says:

    Sorry, I didn’t mean to suggest that that was what you were saying. I’m just thinking that for people who don’t have the option of bulk beans and rice, I can totally see how cat food might be their cheapest option for feeding themselves, if they can buy it from the corner store a couple of cans at a time, and it doesn’t require any cooking or storage of leftovers.

    But as I said, I have no idea how many people actually do this in reality.

  73. lurker carl says:

    Are empoverished elderly, or anyone else, eating cat food because they can’t afford groceries? I doubt it. At little to no cost, food is available from local food banks with volunteers extending the service to shut-ins. Meals-On-Wheels home delivers freshly prepared meals every day. Cats everywhere can rest assured that very few Americans are eating up their food.

    Cats and dogs survive quite nicely on pet foods so it’s not poison or tainted garbage. Nutritionally, pet foods would be better than hot dogs, tater tots, ramen noodles and rice krispies. Maybe Trent can include some one pot recipes with kibble and bits for some really cheap meals, one bag would go a long way.

  74. jim says:

    I distinctly remember a news story about an elderly woman on fixed income who had resorted to eating cat food because she couldn’t pay all her bills. It was probably 20-30 years ago. But apparently it has happened (assuming the story was true and my own recollection is accurate). I tried to find references to it but I came up empty in my google searches.

    I’d hazard a guess that more people have been contestants on Fear Factor and ate worse things voluntarily for prize money than resorted to eating cat food out of poverty.

    To Katies point, I agree that eating cat food may not even be cheaper. Cheap dry cat food is 77¢/pound. Potatoes or flour cost half that.

  75. kristine says:

    @Katie- it happens. As a Pratt student in Bklyn, once in a while I would see an elderly couple taking a ton of time in the cat food aisle, then buying only cat food, crackers, milk, and a few oranges. Cat food covers most nutrients, and is cheap. I only realized what was going on when I heard a very old woman say, “But I didn’t like the taste of that one last week.” But they would be offended when I offered money. So I learned to say- oh darn, I bought too many of those! (whatever it was), and give them one. I also saw windows with only sheets tacked up when it was 5 degrees out- it was prevalent. Poverty exists. And I saw these people go to work every day, and at the laundromat on weekends. The working poor exist.

  76. Katie says:

    Not trying to deny poverty, Kristine – specifically wondering about the cat food.

  77. Johanna says:

    @jim: Potatoes and flour are only that cheap (in my experience) when you buy them in big, enormous bags. Buy them in smaller quantities, and the price goes up severalfold. So it’s the same issue as with the bulk rice and beans: You have to be able to transport and store a large quantity of food, which is not equally practical for everyone.

    Plus, you need a functional kitchen, functional cookware, and gas or electricity (that hasn’t been shut off) to cook with. And, for flour especially, other ingredients to add to whatever recipe you’re making. I have to think that anything you could make out of flour by itself would not be *that* much more appetizing than cat food.

  78. lurker kero says:

    @Q2 Another point of clarification: If Joanna is an active participant in an employer-sponsored retirement plan like a 401(k), she may contribute to a traditional IRA but it will _not_ be deductible if her AGI is high enough (over $66,000 AGI for 2010, filing single).

    If she does choose to make nondeductible contributions to a traditional IRA, she may want to keep those contributions in a second separate IRA. It will make filing taxes in retirement less complicated if deductible and nondeductible contributions are not commingled, because if they are mixed together then her withdrawals come retirement will all be part taxable, part tax-free.

    But Joanna’s already doing the right thing since, as commented above, her AGI is below the limit for Roth IRA contributions.

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