"SHOW ME THE MONEY" VIEWS on HOW to make MONEY GR

[retailguy]

I just did the math behind it at 8% interest a year while putting away 4000 dollars a year starting at 22.

Assuming you withdraw this 43 years later at the age of 65, you will withdraw 1,415,689.95 dollars. Thats a ton of money. It's an even more ridiculous amount when you factor in only putting in 172000. That's an absolutely ridiculous amount of profit.

What is a common matching amount for a company on your 401k?

<switch> Light bulb, ON.

I used to participate in a 401K with a major oil company that matched up to 6%. It is probably lower now? don't really know but it is company specific. The company can choose to match as it pleases. There is probably some maximum, I don't know what that is, but there is no minimum. Plenty of small companies offer a 401K but do not match.

[Partial]

It's a lot more money when you consider that it's not taxable income.

Yeah, that is absolutely ridiculous. Normally that would be taxed like what? 35%

[Scott Campbell]

Plenty of small companies offer a 401K but do not match.

I think those are still a good idea becuase they're tax deferred, and I've always liked the way automatic payroll deductions force you to save.

[Scott Campbell]

It's a lot more money when you consider that it's not taxable income.

Yeah, that is absolutely ridiculous. Normally that would be taxed like what? 35%

It totally depends on how much taxable income you have. In the loose scenario we've been talking about, you'll only be paying taxes on your 401K withdrawls and any Social Security income if you're lucky enough to receive any. The taxes on your 401K withdrawls shouldn't be too bad, because any of the Roth money you withdraw to live on isn't treated as taxable income, and will allow your 401K withdrawls to be taxed at a much lower rate.

You don't need or want all of your money in a Roth, because you can have retirement income up to a certain amount before they really start sticking it to you in taxes.

[Partial]

What does tax deffered mean?

At my estimated 50k salary out of college and assuming the company matched to 5%, which is what the company I am interning at does now, I would be putting in 4000 a year when you don't factor in annual raises. Thats the same as the IRA, so in total I would be putting in 344,000 and getting out 2,831,379.90. That's absolutely ridiculous!

I am assuming by getting my MBA, working hard, and annual raises I could get my salary up to 80,000 a year, and with that extra money I could pay for my children's college and stuff someday.

[retailguy]

What does tax deffered mean?

At my estimated 50k salary out of college and assuming the company matched to 5%, which is what the company I am interning at does now, I would be putting in 4000 a year when you don't factor in annual raises. Thats the same as the IRA, so in total I would be putting in 344,000 and getting out 2,831,379.90. That's absolutely ridiculous!

And that concludes our discussion in the value of compound interest.

[Scott Campbell]

What does tax deffered mean?

Good qeustion. Tax deferred means you don't pay any taxes on it now when putting it away, or while it's growing. You pay taxes when you withdraw it.

Example. 401K.
Let's say your making $100K/year. And just to keep the numbers nice and round, let's assume your marginal tax rate is 50%. Marginal tax rate is the percentage of tax you pay per dollar of income on the last dollar you've earned for the year. In other words, your tax rate on the first $1000 you earn for the year is 0%. The tax rate on the last $1000 you earn for the year is 50%. In this case your marginal tax rate is 50%, even though your likely to only pay about 30% in taxes overall. That is illustrative of how this country's progressive tax scheme works.

Anyway, you can put up to $15,000 of your own money into your 401K for the year. That's irrespective of the company match. Doing so lowers your tax bill for this year by $7,500 ($15K 401K contribution x 50% marginal tax rate) because it's tax deffered. So it really only cost you $7,500 out of this years cash flow to put that $15,000 away. That is our governments way of telling anyone who can do math that they'd really like them to save for retirement.

Now your contribution grows tax free for 40 years or so, and it's time to withdraw. But you have no income from working anymore, and you've got a bunch of money in your Roth, so the money you take out of your 401K to live on puts you into a (lets say for the sake of argument) 10% tax bracket. Not only have you deferred the tax until withdraw, but you've managed to avoid much of it altogether by withdrawing it while you're in a lower tax bracket.

That's pretty much what tax deferred means. In this case you'd have to have $8000 of income to net the $4000 after taxes investment required to max your Roth for the year. And it takes quite a few years before the money you make as a return on investment in that Roth will exceed the advantage of being able to defer the taxes until retirment withdrawls.

You don't want all non taxable income - Roth money. And you don't want all tax deferred income in retirement like the 401K money (unless you have so little that you'd never trigger any tax liability). You want some mixture of both to optomize your tax situation.

[Partial]

I want to thank you guys for all the time you've taken to share your wealth of knowledge. I appreciate it very much, and I'm sure everyone else around here does too. There is some really powerful and great information in here!!

[Bretsky]

so essentially, the jist that I am getting is as soon as you're out of college, max out your Roth IRA and put as much into your 401k that your company will match. Then, while I'm still young and in the process of getting settled, live in a craphole for a few years, and avoid having kids until I am 30.

Check with your financial planner for Roth vs 401K. The decision is dependent upon the type of 401K you have available. I see the 401K as more important than a Roth, provided the employer does some type of "match". Matching funds are the biggest blessing an employee can hope to get from an employer.

When you have a 401K available, find a way to contribute the amount required for the max employer match immediately. Then structure a "plan" to get to the maximum you can invest. One painless way to do that, is to take a portion of your annual raise, I suggest 1% or 2% if you got a great raise, and add that percentage to your contribution EVERY year up to the max allowable. You still get a "raise", and your take home paycheck never falls. It is as "painless" as it gets.

I don't know your situation, however, I might be inclined to steer you from a Roth at this early point, and have you save in a common sense mutual fund first towards a down payment. The reason for that, is, that while single and earning a good income, you are in the worst tax situation you could be in. I could honestly advocate you purchasing a home with less than 20% down, because of the tax ramifications for you. You will actually see a tax benefit in the early years, whereas a married couple with a child may not see any tangible benefit in tax savings with a home purchase.

I still wouldn't recommend purchasing with less than 10% down, HOWEVER, you could make that work fairly well if you can achieve an income of $50K as you stated. I'd think in 1 1/2 -3 years you could accumulate $25K for a solid down payment, maybe more depending upon your lifestyle choices.

Whatever you do, resist the urge to buy that $40K set of wheels. PLEASE. Get a sensible car, pay it off early and drive it until the wheels fall off.

Five years of good planning will leave you "set" for life. I'm not kidding.

I've got more for you later....

Everyone clings to that down payment. Scott brought up that crappy PMI.
PMI does suck; but you don't need 20% equity anymore to have it.

Good Ratios, Good Credit, a Few Reserves. A bank can do a 80% Fixed Rate First Mortgage and a 15% 2nd Mortgage with 5% downpayment. NO PMI. Now the 15%, being a 2nd, is at a higher rate of around 9%, but paying 9% on a 22,500 Mortgage (150G Purchase) will provide you with a MUCH GREATER savings than paying Private Mortgage Insurance, or what I refer to as Poof Away Money. And some banks can also do a 80% First Mortgage and a 20% 2nd Mortgage w/o PMI as well.

And if you are a good buyer and at a bank that doesn't have these programs, then IMO you are at the wrong bank.

[Bretsky]

I think the difference between your 38%, and my 20-25% was that I was able to shave an additional 1/2 point off my interest rate by moving from the 30 year fixed to a 15 year fixed. I'm not sure what the spread is today.

Yes, I assumed that there was no change in rates. You're right that there used to be an advantage, but you don't even see anyone advertise 15 year rates anymore. It's been so long since I've had a mortgage, I just assumed that there is no difference. B?

Even a half percentage difference would put the figure in your 20% range. Maybe less than that.

Right now the difference between a 30Yr to 15 Yr is around 3/8th of a percentage point.

[Bretsky]

yes, I am going to make sure to keep this thread devoid of political spamming. Anything that ruins this thread will be moved, that is for sure, as I feel strongly about this and feel everyone here can benefit from this. I'll see to it this stays focused and somewhat organized.

Bretsky, I have to give you props for getting this started. I have learned more reading this than in my two years of higher education so far. This is a great thread. And to think it all started with a debate in Tank's blog

Thanks Partial,

My motivations for doing this was several. It occured to me that our beginning discussion in Tank's blog could get monsterous and I didn't want to ruin his blog with valuable real world information.

Secondly, I felt I could add a lot of views to ponder in here; I'd argue there is no exact right or wrong way to accomplish your goals as there are many ways for you to get there. Others might disagree. So to have views/theories debated and tested can be helpful to many.

As a sidenote, I had no idea about the wealth of knowledge Scott would provide to this thread and appreciate and respect him in a new light.

Third, in all honesty, I want to get the word out to others in here about what I do for a living and the fact that I'm dam good and treat others fairly.
People in here buy and sell houses. I do loans throughout the midwest. There is no reason why I can't help people in here out and a little marketing never hurts. I've even thought about using my personal pic as my avatar along with a signature at the bottom regarding my profession..........but for those of you who've seen me I just might scare people away.

And Fourth, I enjoy giving views to any blood fresh out of college who is open enough to listen. Many of us are part way through the journey, and it's the smart ones who learn from other successes and failures. Hopefully the thread can allow a couple smart ones to emerge from Packerrats.


Cheers,
B

[Bretsky]

I just did the math behind it at 8% interest a year while putting away 4000 dollars a year starting at 22.

Assuming you withdraw this 43 years later at the age of 65, you will withdraw 1,415,689.95 dollars. Thats a ton of money. It's an even more ridiculous amount when you factor in only putting in 172000. That's an absolutely ridiculous amount of profit.

What is a common matching amount for a company on your 401k?

SOME DO MORE, but I'd say typical around the area is a company will match up to 3% for every 6% your invest. This means at bare minimum you should invest 6%.

[Scott Campbell]

Everyone clings to that down payment. Scott brought up that crappy PMI.
PMI does suck; but you don't need 20% equity anymore to have it.

Good Ratios, Good Credit, a Few Reserves. A bank can do a 80% Fixed Rate First Mortgage and a 15% 2nd Mortgage with 5% downpayment. NO PMI. Now the 15%, being a 2nd, is at a higher rate of around 9%, but paying 9% on a 22,500 Mortgage (150G Purchase) will provide you with a MUCH GREATER savings than paying Private Mortgage Insurance, or what I refer to as Poof Away Money. And some banks can also do a 80% First Mortgage and a 20% 2nd Mortgage w/o PMI as well.

I wish I had that option when I bought my first house. Any mortgage broker/banker that helps you avoid those kind of fees deserves the transaction fees they're earning.

Any other tips for minimizing transaction costs when you're closing on the next house?

[MJZiggy]

I've even thought about using my personal pic as my avatar along with a signature at the bottom regarding my profession..........but for those of you who've seen me I just might scare people away.

Oh puhleaze!! Can we get Mrs. Bretsky on here to give her opinion on this? You must not be too bad or she'd never agree to boymaking.

[Scott Campbell]

I want to thank you guys for all the time you've taken to share your wealth of knowledge. I appreciate it very much, and I'm sure everyone else around here does too. There is some really powerful and great information in here!!

Packer Rats - your one stop internet shop for Packer news and retirement planning. If only we could round things out with a thread covering menapause.