Reader Mailbag: Pride

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. Safe harbor 401(k) match
2. Income tax question
3. Shouldn’t numbers win?
4. Credit freeze question
5. Finding time to read
6. Feeling hopeless
7. How much needed in 401(k)?
8. Reason to shop at Hy-Vee?
9. Old mattress?
10. Why Roth 401(k)?

Pride convinces you to buy a more expensive car for no other reason than it will look good to others.

Pride convinces you to turn away a helping hand when you need it most.

Pride convinces you to avoid looking at the “cheap” houses.

Sometimes, pride ends up costing you without really helping you.

Q1: Safe harbor 401(k) match
I have taken a new job and my employer has a safe harbor match for their 401 (k) of 3% of my salary, whether I participate or not. Most financial sites say to participate in a 401 (k) up to the match and then put money in an IRA. In this circumstance what should I do? I want to put away at least 15% of my income toward retirement.

– Marcus

That’s what you should do. If you are eligible for a Roth IRA, I would contribute to that instead of your 401(k).

Since you’re automatically receiving 3% in your 401(k), you should strive to contribute around 12% of your income to the Roth IRA. If 12% of your income exceeds the Roth IRA contribution cap (which is $5,500 for most people), then contribute the difference to your 401(k).

I don’t know how much you make, but let’s say it’s $40,000 per year. That would mean that 3% of that amount is $1,200 per year – what your employer should be putting into the 401(k) – and 12% of that amount is $4,800 per year – what you should be putting into your IRA to hit your 15% target.

Q2: Income tax question
I just did my taxes using TurboTax and I found that my refund was really big – about $3,000. I did them again and came up with the exact same number because I thought I had done something wrong. What kind of mistakes can cause this big of a refund?

– Dan

There are a lot of reasons this could be happening. If you’re unsure, take everything to a professional tax preparer.

The most likely explanation is that your withholdings aren’t accurate. In other words, you’ve instructed your employers to hold too much out of your paycheck.

To figure out what you should be requesting for withholdings, use this handy IRS withholding calculator. Take the results and stop by the human resources office at work to make sure your withholdings match what the calculator says they should be. If you’re lowering the number, that’s likely the issue with your taxes.

Q3: Shouldn’t numbers win?
I don’t understand how there can be “differences of opinion” in personal finance. Shouldn’t the numbers win?

– Sara

In an ideal world where people could separate their personal wants, desires, and motivations from personal finance and where we could all predict the future of all of our investments, the numbers would win.

Unfortunately, we don’t live in this situation. Different people have different spending habits, which are shaped by their situation and their psychology. Different people have different risk tolerances, too.

It’s never all about the numbers. The numbers can certainly provide some guidance, but you still have to make good decisions and you’re still often relying on the unknowns of many investments.

Q4: Credit freeze question
I had a bad ID theft scare last summer, so I froze my credit bureau files. I forgot to unfreeze them before attempting to switch cell phone providers today, and the new carrier asked for my credit bureau PIN numbers. Is that normal? I don’t feel comfortable giving any or all of those PINs to a stranger who isn’t affiliated with a credit bureau.

I delayed the switch until I can unfreeze my files, but I was just curious if you’d heard of this before. It was particularly disconcerting because they originally just asked for one PIN, and when I asked which one, they couldn’t tell me. I told them I have three, and they said to try all of them until they find the one that works. I’m switching to a reputable carrier but it felt shady.
– David

I can understand why they asked, but I probably wouldn’t hand over my PIN either.

The reason they asked is that they wanted to check your credit report before you opened an account with them. This is pretty normal behavior for a cell phone company. They want to make sure you’re not just going to get a phone and then not pay the bills.

I’m not sure what you mean by the “three PIN” thing, but I would be very wary about handing over personal identification numbers to anyone, period.

Q5: Finding time to read
Your 2014 reading goal of reading 100 books is seriously impressive. How do you find time to read so much?

– Daniel

There are several things I do to find time to read.

When I go to the gym and walk/jog on the treadmill, I take a Kindle and blow the text up to a huge size. I barely watch television and instead often fill relaxation time at home with books. I keep a Kindle app on my phone and read books when I’m waiting almost anywhere, like at the doctor’s office. I usually also read just before bed until I’m tired enough that keeping my eyes open is difficult, at which point I usually back up a few pages and stick in a bookmark (because those last few pages are usually poorly remembered).

The best move I’ve made is to institute a “sustained silent reading” period for my children when they get home from school. For the last month or two, when my children get home, we all spend half an hour simply reading whatever we want. We read silently, all together in the same room. The only time anyone speaks is if the kids are asking me for reading help, like the definition of a word.

Over the course of a week, that adds up to a lot of reading.

Q6: Feeling hopeless
We calculated our net worth at the end of 2012 and the end of 2013 and even though it felt like we spent 2013 living extremely tight our net worth only went up a little bit. It all just feels hopeless. What good is living like a miser if you don’t get anywhere?

– Joan

It’s often hard to assess how much your changes are really affecting your life. Net worth can sometimes help put it in perspective, but not always.

How is your debt doing? Is it lower than it was at the start of last year? Did you have an unexpected crisis or two in 2013? Where would your finances be if that crisis didn’t happen at all? I bet that comparison would look a lot better.

Personal finance isn’t just a road that goes straight ahead to wealth. There are a lot of steps back along the way. The key thing to always remember is that you’re the one deciding whether or not to take steps forward. That part is completely up to you.

Q7: How much needed in 401(k)?
Hello. I’ve been reading your blog for a couple of years now, and it’s helped me quite a bit. One area that I really have benefited is with my 401k. I checked my balance, $30,000. I’m 31 years old and would like to keep working at least in some capacity until I’m close to 60 or 65. I’m working towards financial freedom so that I can choose what that capacity is. I’ve used a few calculators, and most of them are similar that if I stop contributing to my 401k, @ 8% return, I would have ~$450,000 in 34 years. This seems like quite a bit for retirement, especially since I could stop contributing and focus more on debts, then I eventually will have more in savings. Although, some calculators estimate that I would need several millions of dollars for retirement because my spending would only decrease 25%. Do people really do that? My mortgage is my biggest expense, once it’s paid off I really don’t want to increase my life style. Am I just crazy or is it everyone else? Millions? Really?

– Stanley

The problem with your plan is that it ignores inflation. Historically, inflation has been around 3% per year. If you’re not going to retire for 34 years, your dollar is going to go down in value – way down.

In fact, if inflation rates stay at that 3% historical average, each of those dollars will only have the buying power of $0.36 today. In other words, in today’s dollars, that $450,000 will actually only be worth $165,000. If you want $450,000 in today’s dollars, you’re going to need $1.25 million saved up (or so).

Not only that, most people suggest having enough saved so that you only need to withdraw 4% of the balance each year so that it will last for at least 25 years and survive continued inflation growth. 4% of $450,000 is only $18,000, and after the ravages of 34 years of inflation, that’s only $6,500 per year in today’s dollars.

You need to keep saving to be secure.

Q8: Reason to shop at Hy-Vee?
I live in southern Iowa and like you I have tried to figure out which grocery store is the cheapest. Even though a couple of stores around here are cheaper I shop at Hy-Vee anyway for one reason. They have a little screen that sits there and shows your purchases as they’re scanned. Almost every time I go there I find a mistake and have it corrected. When I go to other stores, if I don’t stand there for fifteen minutes studying the receipt, I almost always miss a mistake that they made like double scanning an item or an incorrect price.

– Dana

I agree with you that it’s really valuable to pay attention to grocery receipts. My error rate is about the same as yours – I notice one sizable goof-up per store visit. I also find it easier to notice the goof-ups when there’s a screen showing the purchases as they’re scanned. If you don’t notice the mistake until later, it’s often a hassle to get it corrected at that point, too.

Still, even if you assume one significant mistake at, say, Fareway versus Hy-Vee, it’s still cheaper to get most of our items at Fareway. Of course, we have a family of five, so our typical grocery store trips are likely larger than someone with a smaller family, so that may make a difference.

I still prefer a three-store strategy most of the time – Sam’s Club for some bulk buys, Fareway for staples, and Hy-Vee for more unusual items.

Q9: Old mattress?
My husband and I have used the same mattress for about thirty years. It is nice and firm, just like we like it. I told my son about this and he got really upset with us, telling us that we have to replace a mattress every seven or eight years because they get “worn out.” Is this right? I can’t see any reason to replace ours. We both like it and we don’t have major back problems or anything.

– Suzanne

If the mattress works for you and isn’t causing back problems, I don’t see why you would need to change it.

Generally, after several years, mattresses begin to lose their “spring” and, for some people, that can trigger back problems and other aches and pains as well as reducing the quality of sleep.

If you guys are sleeping well and aren’t suffering from any back problems, I’d stick with what works.

Q10: Why Roth 401(k)?
Recently, my husband’s company started offering Roth 401(k) investments along with the traditional 401(k) investments.. Although we do not qualify for Roth IRAs because of our income, he is allowed to contribute to the Roth 401(k) plan.

I realize with the Roth we pay taxes on the money now and won’t be taxed on the money when withdrawn. We are about 10-15 years from retirement.

Right now, our upper income falls in the 33% tax bracket. But at retirement, we will probably be more in the 15% tax bracket. Given this, it seems to me that the Roth 401(k) isn’t really a good option for us as earnings would need to outpace the 18% difference in taxes now. We max out on 401(k) contributions each year.

The U.S. Tax system is so complicated, and there are so many unknowns with investments. I don’t find it surprising that so many of us are confused.

So I guess I have two questions:

1. What are the advantages of Roth 401(k)s?
2. Although you talk a lot about finding/utilizing financial consultants, do you have any advice on finding/utilizing tax consultants? When I ask my financial guy about anything tax related, he always prefaces any answer with the fact that he’s “not a tax consultant, but . . . ” :-)

– Mary

The advantage of a Roth is to protect people against having to pay higher taxes in retirement than while working. A normal 401(k) does the opposite – you’re betting on lower taxes in retirement.

Right now, you’re paying much higher taxes than you would in retirement, which leans toward a normal 401(k). However, the future of income tax rates is an unknown – they very well may go up in the future, but it’s hard to say how much. I can’t conceive that there would be a huge jump in the lower tax brackets, though, so I would probably lean toward a 401(k) if you’re anticipating such a large drop in income in retirement.

A tax consultant is going to do an amazing job of figuring out how to align your assets in the short term to minimize your taxes, but in terms of figuring out retirement plans, they’re also going to be operating on guesswork. I don’t know that a tax consultant is going to really help you in terms of retirement planning.

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

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