海角大神

401(k) savings: Huge plus, even when retiring at 45

401(k) savings defer taxes and can fund second retirement phase for high earner who wants to retire at 45. See question No. 2 in the reader mailbag for 401(k) discussion. 

What鈥檚 inside?聽Here are the questions answered in today鈥檚 reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1.聽Roth and Traditional IRA
2.聽Investing for very early retirement
3.聽Clutter caused by family
4.聽Next steps for expectant parents
5.聽Finding direction in retirement
6.聽Pay off house or invest?
7.聽Right age for financial lessons?
8.聽Time to buy a house?
9.听滨蝉 Netflix streaming cost effective?
10.聽Is our house worth it?

I鈥檝e come to find that most of the time, the anticipation that comes with waiting for something is at least as fun as the actual moment you鈥檝e been waiting for.

The holidays are nice, for example, but I find the planning and preparation to be at least as much fun at this point. The same goes for birthdays and other events. I enjoy the lead-up, the anticipation, the planning. The event itself isn鈥檛 a culmination, but almost an afterthought for me.

Q1: Roth and Traditional IRA
Is it possible or legal to have both a Roth and traditional IRA? I鈥檓 not sure where to look to figure it out.
- Lincoln

You can certainly have both types, and it might make sense to do so if you鈥檙e interested in hedging your bets when it comes to retirement savings and taxes.

However, you are only allowed to contribute up to the annual cap each year across聽all聽IRAs, regardless of type. In 2012, that limit for most people is $5,000.

So, you could contribute $3,000 to a Roth IRA and $2,000 to a traditional and be just fine, or any other combination that added up to $5,000.

Q2: Investing for very early retirement
I鈥檓 28 years old. I just started a rather stressful job that pays me very well 鈥� on the order of $200,000 per year. I do not want to do this for the rest of my life. Instead, I鈥檓 striving to live on about $25,000 per year and banking the rest, with a goal of retiring at age 45.

How should I financially structure this? Where should I be putting my money?
- Lucas

One way to look at this is that you鈥檙e essentially saving for two different periods. You鈥檙e saving for the period from age 45 to age 59, and then from age 59 onwards.

For the first time frame (ages 45 to 59), savings in retirement accounts isn鈥檛 going to help you at all. Thus, what you鈥檙e going to want to do is save in non-retirement accounts for those years. You鈥檙e going to want to thoroughly cover fifteen years of living expenses as well as the inflation that鈥檚 going to occur over the next twenty to thirty five years. I would do that in a brokerage account that doesn鈥檛 involve fees and invest using a mix of stocks and bonds, focusing heavily on the stocks at first and then switching your contributions to bonds as time goes on. I鈥檇 save at least half of my money this way.

The other time frame will allow you to use a 401(k) to maximal advantage (if you have one) and use an IRA to a bit of an advantage. Your income is so high that an IRA won鈥檛 give you a big advantage over regular brokerage investing because you won鈥檛 be able to deduct your contributions right now, but deferring taxes on your earnings will help some. Your 401(k), though, will be a huge help and you should contribute at least up to whatever match you can get from your employer.

Q3: Clutter caused by family
My husband and I have a fourteen month old little girl. Our first child and the first grandchild on both sides. I myself have never been able to stand clutter, I spent most of my childhood in a small apartment with my father and from a young age every year before Christmas and my birthday was instructed to clean out my toys and such to make room for more. Further more I have a lot of anxiety issues and clutter stresses me to the max.

My mother-in-law and sister-in-law are nearly constantly buying gifts for my daughter. Toys, clothes, etc etc. Things she doesn鈥檛 need. Nor do they ever ask what she DOES need before they decide to buy her something. So far my strategy has been polite thank yous, dropping hints about how she doesn鈥檛 need things, and putting them into this yard sale I am having in May.

Since she isn鈥檛 MY mother I try to let my husband handle any 鈥榮erious鈥� conversations with his mother, but I鈥檓 just not sure what to do, especially after my yard sale, to curb the clutter. And it鈥檚 not just the clutter, I don鈥檛 want my daughter thinking every time she sees them she has to get something. It鈥檚 not the way I want her raised.
- Kelly

Don鈥檛 address this from a clutter standpoint. The aspect that should be worrisome is the expectation that the child will get something each time they see that relative. That聽will聽put strain on their relationship in the future.

If you鈥檙e not comfortable bringing this up, you should have your husband discuss it with her.

In the end, it really is your mother-in-law鈥檚 decision. Rejecting the gifts out of hand is going to cause far more problems with the family than dealing with excess clutter. If you have too much clutter, then have a yard sale, as you mentioned.

My worry would be the relationship between grandmother and grandchild, and I鈥檇 approach it that way.

Q4: Next steps for expectant parents
I am 33 married, dual income with a baby on the way.

I feel like I am at a cross-roads in my life where my decisions over the next few years will make a huge difference 20 years from now. I have successfully eliminated debt except our mortgage which is currently 125k @ 4.875% with 28 years left, but paying an extra $400 a month in principal. Currently, looking at a refi to a 15 or 20 yr loan.

The numbers: I make 100k and my wife makes 40k so we have a nice income for the area. I save 16% of my income to my 403 while my wife saves 10%, and we both receive a 10% match from our employer for putting in 5%.

Current accounts:
Cash 鈥� $112k 鈥� 80k in MMkt
IRA(s) (401k rollovers) 鈥� $170k 鈥� Target date funds, stocks, and bonds 鈥� aggressive mix
403b(s) 鈥� $51k 鈥� Target date funds, stocks, and bonds 鈥� aggressive mix
After Tax Investments 鈥� 11k 鈥� various bonds & stocks 鈥� Where we have been putting cash recently since our nest egg has reached the point it is at.

As you can see, I have been very risk adverse building a large nest egg and even though I have eliminated all non-mortgage debt I have been reluctant to pay down my mortgage more aggressively. My real question is should a refiance? Should I go down to a year鈥檚 worth of a nest egg and put that toward my mortgage? I enjoy the flexibility & security of knowing I have enough cash to live 2+ years given our current living expenses, but I feel like I am missing a huge opportunity to make my family鈥檚 financial future more secure than it will be unless I make a more aggressive decisions within reason.
- Jason

A refinancing won鈥檛 cut your interest rate a lot. If your credit is really good, you may be able to knock a percentage point off of your rate, but you need to make sure that the costs of doing so aren鈥檛 going to eat up what you gain from doing it. It鈥檚 usually not worth it to refinance if you鈥檙e only cutting half a percentage or less.

With that much cash sitting on hand, though, I would pay down that mortgage regardless of refinancing. Even with a child on the way, that鈥檚 a lot of cash to have on hand. The only advantage to cash is the liquidity of it, and if you have a year鈥檚 worth of living expenses in cash, the rest of it should be working harder for you in something that鈥檚 a little less liquid.

If I were you, I鈥檇 retain a year鈥檚 worth of living expenses in cash and put the rest toward your mortgage, knocking it down substantially.

Q5: Finding direction in retirement
I鈥檓 66 years old and married for 44 years. About a year ago, I retired. I had a lot of dreams of spending my days playing golf and gardening and doing things like that. But now I鈥檓 just bored to death. I don鈥檛 feel like I鈥檓 really doing anything worthwhile and most days I barely even want to get out of bed. My wife thinks I am just depressed and wants me to see a psychiatrist, but I know exactly what I鈥檓 missing. I miss my job.

The obvious answer is to go back to work, but I鈥檝e already called some people at my old company and they鈥檙e not interested in hiring me back.

I鈥檓 not sure what to do. We don鈥檛 need the money. I just need to feel useful again.
- Alan

If I were in your shoes, the first thing I鈥檇 look for is a charity that could really use my skill set to improve their ability to bring about positive results in the community.

What organizations in your area could really use the skills you can bring to the table? I don鈥檛 know what your expertise is, but I鈥檓 willing to bet that you have at least some skills that a local charity could really use.

Go there and volunteer. Take on a schedule that gives you real responsiblity there, a responsibility that directly impacts the lives of others.

You鈥檒l not only feel useful again, you鈥檒l get to see your actions improving the lives of others on a firsthand basis.

Q6: Pay off house or invest?
My husband and I owe about $150,000 on a home. We have no other debt. We want to start investing in real estate and we have about $60,000 in savings (we have another $20,000 set aside for an emergency fund). What is your advice on how to proceed: do we pay off the house and rent that out or use that money to put a down payment on an investment property? Thank you for your time!
- Olivia

If you want to start investing in investment properties, you seem to be in the right place for doing so 鈥� assuming you鈥檝e done the homework, of course.

My concern would be that if you take out a loan on an investment property and that property doesn鈥檛 immediately start earning returns, would you be able to handle the payments on two separate loans for an extended period?

If the answer there is no, then I wouldn鈥檛 jump into the investment property just yet. Instead, I鈥檇 pay down my current mortgage.

Q7: Right age for financial lessons?
At what age should I start teaching my kids about money? I have a ten year old that seems to constantly want things and I think he could really stand to start learning some money lessons. My wife says that kids need to be kids. What do you think?
- Charles

I would absolutely start teaching money lessons to my ten year old.

Money lessons don鈥檛 have to be drudgery about the minutiae of tax laws. Often, it can be a lot of fun and for many children it can feel like something of an initiation into the world of adults.

My suggestion is to start with an allowance that鈥檚 not tied to any sort of work. The only requirement is that they budget it and explain why they鈥檙e budgeting it. Make the child give a small portion of the allowance to charity and another portion to a very long term goal, like a car when they鈥檙e 16 or college savings. The rest should be split up between free spending and saving for whatever goal they have in mind.

All they have to do is explain how much they鈥檙e spending and saving in various categories and why to earn the allowance, and they have to stick to this plan to keep earning it.

I already do this with my six year old and four year old and, for the most part, they understand it and enjoy it.

Q8: Time to buy a house?
My husband and I are 27. We own a tiny 2-bedroom condo purchased in 2007 (at the height of the market; it鈥檚 now worth about 60% of what we bought it for). I finished grad school several years ago with about $54,000 in student loans. My monthly payment on a 10-year repayment plan is $627/month. I鈥檝e overpaid some and currently owe $37,000 2 years into repayment, though the monthly payment of course remains the same. Our problem is housing 鈥� we are just fine right now with the two of us but are planning to start a family soon, and we鈥檒l be extremely cramped in our current living situation. We鈥檙e both pretty frugal and minimalist, so I know that we could do it, but it would be a struggle. The even bigger struggle is that, due to the housing market and increased rentals in our neighborhood, the area has declined significantly since we bought. Our neighbors are now pretty transient, and we鈥檇 like to be in a safer, more stable place when we have kids. With our condo so far underwater, we鈥檒l have to rent rather than sell if we leave. So the question is this 鈥� should I extend the repayment plan on my student loans (I could get my payment down to around $250/month on a 25 year repayment plan) so that I can contribute the extra cash flow to savings for a down payment and take advantage of the current buyers鈥� market and low interest rates, hopefully making up for the extra interest in student loans by getting a better deal on a house? Or should I continue to make the large payments on the debt and risk that the market will have turned around by the time I pay off my student loans and we will have missed the opportunity to get in a larger house for an affordable price? My student loans are at 6.55%, and our current mortgage is at 4.2%. I鈥檇 expect we鈥檇 get a similar or slightly better rate on a new mortgage. We have an emergency fund and are both contributing to retirement accounts, so those issues aren鈥檛 really big factors in the decision.

My concern is that if we wait a few more years to buy, interest rates will have gone up and housing prices will have improved to the extent that our larger down payment would be negated.
- Margaret

This is a tough one, with benefits and drawbacks either way you go.

Given that you have a history of being responsible with your money and aggressively paying down debts, I would probably suggest that you go for the plan that gets you into a house sooner. The reason for that is that you鈥檙e showing financial responsibility and will likely not use this change in plans to dig yourself into a hole that you can鈥檛 get out of.

The safest financial route, of course, is to stay where you鈥檙e at, get your current mortgage paid off, and then see what the market can bear. However, given the changing situation in your family and in your neighborhood, life may be trumping the safest route.

Q9: Is Netflix streaming cost effective?
My wife and I don鈥檛 have cable television, but we do have high speed internet at home. We rent a movie about three times a week to watch at home, but most of the movies we watch are older ones that are very cheap at the local video rental store. We usually spend $0.50 or $1 per rental. We have been thinking about getting Netflix streaming since our Blu-Ray player has it built in. Do you think it鈥檚 a cost effective option in our situation?
- Alex

The movie selection on Netflix streaming is highly eclectic. There aren鈥檛 a lot of big-ticket new releases on there, but there are huge catalogs of older movies and more obscure films on there. Our 鈥渢o be watched鈥� list is full of stuff.

Where it really shines, though, is television series without commercial interruption. There鈥檚 a lot of really well-made series on there, like聽Breaking Bad听补苍诲听Mad Men, that can be watched a full season at a time without commercials. It doesn鈥檛 always have the most current season of shows, but it鈥檚 a great way to watch a slightly older show in its entirety. In fact, I鈥檇 say it鈥檚 the preferred way to watch a show with dense storylines, like聽Lost.

If you鈥檙e looking at a dollar-for-dollar comparison, you鈥檙e going to be about the same with streaming versus renting at the rate you describe. You鈥檙e probably spending about $10 a month on renting given the numbers you describe.

My suggestion? Try it for a month or so and see if you like it. If you do, stick with it. If you don鈥檛, cancel it and go back to renting discs.

Q10: Is our house worth it?
My husband and I bought an old liveable fixer-upper about 4 years ago. At the time we did not have children and figured we would slowly fix up the house ourselves. Now, 2 kids later, we have neither the time or the money to fix this house and are in dire need of some kind of life change so we don鈥檛 dig ourselves deeper into an already deep hole.. We have about $35K in credit card debt, on top of that my husband is paying off his student loan $242/month, a monthly car payment of about $340/month and our house payment which is about $1300/month (we have a 5 year arm set at 2.9%). We do not have any emergency savings, but we do put away for retirement through our employer. We are fully aware we need to make a BIG change but do not know where to start. We need to choose between keeping the house and fixing it which could be anywhere from $50K-80K in renovations in hopes that in the future this house will be a great investment and will increase in value since our neighborhood is really booming right now, or sell the house, and get something newer and more affordable with no renovations needed and work on just paying off the existing debt that we have created. In the meantime we would live with nearby family during renovations and possibly rent our house out for a certain amount of time to pay off the expenses from renovations and then move back in at a later time 鈥� or until our family kicks us out!

Is it a smart move to invest in a house that more than likely will be a good profit for us down the line, even if it means putting us further in debt and possibly causing stress on our family while having to shack up with more family for an uncertain amount of time? We are established here and love our neighborhood, but is this house really worth it?

I am leaning towards starting fresh 鈥� but easier said than done. I don鈥檛 want to kick myself later for letting go of a house that could potentially be a solid investment..Any advice would be appreciated!!
- Joely

This is another question that comes down to pros and cons on each side of the equation.

To me, it comes down to this: do you like where you live? A neighborhood where you know lots of people, are familiar with the services, and have many good relationships is worth a聽lot. In fact, it鈥檚 one of the big reasons why Sarah and I aren鈥檛 rushing too fast to move into the country: we love the people near where we live right now.

If I were you, I鈥檇 stick with it and try to improve your current home. Here鈥檚 an idea: instead of stressing out about doing it yourself, why don鈥檛 you take advantage of what you like about your area? Simply have a home improvement party. Get a bunch of food, a bunch of beverages, and invite a bunch of people to spend a day kicking out a major project or two in your home? I know several people who have done this, including a circle of friends who made a series of weekends out of it in which all the familes got together at one house, worked on a big project, let their kids all play together, and everyone ended up with nicer homes.

There are lots of options for making this work if you think outside the box a bit.

Got any questions?聽Email them to me or leave them in the comments and I鈥檒l 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.