Nov 03

This post has been in the works for some time, nearly two years. Talk about a bit of writer’s block!

Attending FinCon14 (The Financial Bloggers Conference) gave me a chance to share my story, and hear so many people encourage me to write and share it with my readers as well.

Two years ago, shortly after my 50th birthday, my wife and I were both let go in a company layoff. 30 years, working for the same company, had come to an end. We both had our eye on our number and we had already agreed that she could retire as soon as she was ready to. The numbers all pointed to me taking a bit of an early retirement by 55 or so. Our jobs were in high tech sales, and I started out really liking it, but the last 10 years or so, I grew to dislike it more and more. So much so, that when I got word I was getting let go, I had a sense of relief. The real question is why I stayed so long at a job I grew to hate. And a great question that is. The money was good, but any lateral move in the industry would have replaced the salary. In fact, depending on the economy, there were times I could have landed a higher paying job. Familiarity. Fear of change. Stockholm syndrome?

Regardless of why I stayed, it was over. On the ride home, I told my wife it was time to move on, and do something completely different. Neither of us were in too big of a rush, as the severance and unemployment benefits were enough to float us for a full year without needing to tap our savings. Many times in life, one observes that timing is everything, the layoff was in late 2012, and in 2013 the market had its best year since 1997, returning over 32%.


S&P Oct’12 – Dec’13

Had the movement of the market been different, I might have felt pressure to go in another direction. As 2013 moved along, our number seemed much closer to achievement. We sat down and reviewed our budget, and found that our spending was a comfortable 50% or so of our last few years’ income. On a side note, the rules about 80% replacement rate are rules of thumb and little more. What really counts is what you spend, not what your final gross income was.

One interest I’d always considered was a career as a math teacher. I took the qualification exams for both middle and high school math. Despite what they say about the lack of teachers, in my area, every position had a line of dozens of teachers applying. If I were hiring, I’d look for someone with experience, too. Just as I was pondering the idea of simply being retired, I was contacted about a position as a math aide. The job was part time, just 2 days a week, and the responsibilities included giving exams to students, tutoring students to help them catch up on missed classes, and helping them study for upcoming exams. The key things missing were any required interaction with parents, prep for lectures, and any paperwork. Even for this position, there were multiple candidates. Whatever I said during the interview must have made an impression. A combination of fondness for my own study over 3 decades ago, sharing how I was helping my daughter, an 8th grader at the time, and feeling that I could make a difference in his department. The next night, I had an email saying the job was mine.

By coincidence, a neighbor was expanding his own business as a real estate investor and developer. He approached me and asked if I’d like to come work for him. I started both jobs the same week and within two months, I had my real estate license. Both jobs started as trial positions, and as it turned out I am having a blast in both fields. Both of my bosses asked me when I planned to work for them full time. For now, the two jobs are ideal for me. I’ll share some stories of my days at both jobs, and why I wake up with a smile at 5:15 AM when I swore I wasn’t a morning person. I’m also investing in real estate again, an endeavor I’d given up on over 20 years ago, but I’ve now been given a second chance.

written by Joe \\ tags: ,

Jan 28

It’s possible, of course, but is it really common? From a number of recent articles, you’d conclude that we are now a nation of savers. In early December, I read, “Could You Be Oversaving for Retirement?” on Yahoo Finance. (To give you a hint as to how rare I thought this was, the word oversaving wasn’t in my speck check dictionary till now.) A couple weeks later, Jean Chatzky wrote You may be saving too much for retirement for CNN Money.  I like Jean’s writing, and she was kind enough to cite the source for this wave of ‘saving too much’ articles that have sprung up. It was a paper by the Head of Retirement Research at Morningstar, David Blanchett. Estimating the True Cost of Retirement dispels, sort of, the notion that one will need 80% of their pre-retirement income post retirement. I say ‘sort of’ because one’s earnings aren’t linear, nor is one’s lifestyle, and there are too many variables to project 40 years out with any level of confidence. The 80% number is as good a rule of thumb as any especially when considering the alternatives. If, instead you plan for 60, and as you near retirement, realize that in those final years your lifestyle has crept up a bit, more vacations, a second home, any number of things, it will be tough to catch up to where you should be. But if you plan for 80%, and, with 5 years to go till retirement, you realize you have more than you need, it’s a simple matter to retire early, or just enjoy the fact that you have an extra cushion.

David’s paper makes excellent points, and is a worthwhile read, but it doesn’t discuss one thing, the amount we are actually saving. The average retirement savings for those 55-64 is $69,127. If you understand how averages and median compare, you know that for every saver with a million dollar retirement account, a hundred people will be $10K less than that average to balance out. This forces the median, the halfway point, far lower than the average. In fact, the same report cites that 39% of those age 55 and older have less than $25,000 in their retirement accounts. To be clear – No, we are not saving too much, not by a longshot.

There’s a point to be made that a reasonable retirement goal might be more motivating than one that appears so far out of reach. It’s also safe to say that retirement spending is better correlated with preretirement spending than with preretirement income. This is tougher for a younger person to analyze. I got married at 32, bought my first ‘real’ house at 34, and became a dad at 36. At 40, I had a real grown up budget, 20% to the mortgage, 10% to the college account, 15% to retirement, etc. Not tough to see the math show that 45% of our income was budgeted to things that would be gone when we retired.

In the end, the question isn’t about averages or rules of thumb, it’s about you. Only you can calculate your Number.

written by Joe \\ tags: ,

Nov 07

As exciting as the new tax table was for me, the retirement limit announcement produced a hollow thud.

You see, for 2014, the 401(k), 403(b), 457, and Government TSP are all unchanged at $17,500 limit, with a $5,500 catch-up provision for those 50 and older.

The IRA limit is also unchanged at $5,500 with a $1,000 catch-up for 50 and older. The phaseout for IRA deductibility for a single filer covered by a workplace retirement plan is between $60,000 and $70,000, and for married filing joint, between $181,000 and $191,000. The AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly.

For those in that phaseout range, these numbers are important. Above or below them, and you’re not impacted at all.

This lack of an increase comes thanks to a low CPI inflation rate, which is either good, or if you are a conspiracy theorist, is purposely understated to keep Government programs COLAs from increasing too much. Either way, the numbers are out.

written by Joe \\ tags: ,

Sep 18

Have I lost my marbles? I hope not. Let me explain by starting with an analogy.
There’s a difference between treasure and a treasure chest. It’s not just a pedantic picking apart of words. Not understanding the  distinction is costing people a lot of money.

A 401(k) is a retirement account typically sponsored by an employer, although there is also a solo-401(k) option that self employed individuals can take advantage of. Until 2006, the 401(k) was strictly a pretax account, deposits from the employee would be deposited and save the tax at the time, grow tax deferred until retirement and withdrawn at (potentially) a lower tax rate. Employers’ matching deposits are also pretax and taxed on withdrawal. In 2006 the Roth 401(k) was introduced, allowing deposits to be made post tax, with the growth tax free if withdrawn after 59-1/2 or after separation from your employer after age 55.


This is a high level overview but you see what’s missing? The Investment. I’ve only described the nature of the account, not the investments it contains. A 401(k) can have a variety of choices of investments. You may pick from a money market fund, short term bond fund, various stock funds including domestic and international. Some even allow you to shift funds to a broker portal where you can invest as you wish in individual stocks.

The distinction here is that the risk or reward has little to do with the 401(k) per se, and everything to do with how you choose to invest. In fact, you can made the same good or bad decisions in a regular brokerage account as you can in a 401(k).

This is my long-winded way of saying not to let the market volatility scare you out of proper long term retirement investing. I’ve had dialog with people who choose prepaying their 5% mortgage over making a matched 401(k) deposit, and when I point out the instant 100%  gain they can see in their retirement account, I hear they’d prefer the certainty of the 5%/yr interest saved over the risk their retirement account loses half its value as it did in the months leading up to March, 2009. The flaw in their reasoning is twofold. First, as I discussed, they need not be fully invested in stocks. The litmus test for how much of your account you should allocate to stock is to answer the question – If the market fell 50% over the next year, how would you react? If the answer is to sell at the bottom, you are too high in stocks. Second, your investments aren’t made all at once, but over decades. When you are buying into the market with each paycheck, your average cost is the average not last week or year, but the average over the last decade or more. And hopefully your sale price isn’t at the next bottom, but a few percent each year starting decades from now.

written by Joe \\ tags: ,

Sep 02

A guest post today –

Investment dollars have been pouring into rental property over the last few years.

Institutional investors have been big buyers of real estate to rent – finding the yields higher than elsewhere in the market and property prices reasonable following the recent housing crisis. The wide interest has been highlighted (or capped?) with Deutsche Bank and Blackstone’s recent offering of bonds backed with rental property assets.

Individual investors have also been keen to grab to rental property as investments, particularly those confused and frustrated by losses in the stock market. Many use a common justification that goes something like: “I want to invest in something I can touch”.

Case in point: we at Guide Financial recently met Kumar while doing software testing. He is a well-paid IT consultant, but doesn’t hold any money in a retirement account. Instead, he gathered all his money in 2008 and bought a second house, which he now rents out.

He expects that his rental income will provide all the financial security he needs in retirement. His justification – “I can see and understand a house.”

But how does a house as a retirement asset stack up in a careful comparison against more traditional options?

The benefits:

Nice cash flows – Like bonds, or high-dividend stocks, rental properties provide steady cash flows, clearly ideal for people approaching retirement. In recent years, the yields have exceeded those available on other assets, widely above 5% in the US through the beginning of 2013.

Inflation protection – The other great feature of rental property is that it is effectively indexed to inflation. As prices rise in the economy, you can usually pass rent increases on to tenants. This combo of high yields and inflation protection is rare in fixed income securities.

Tax benefits – Landlords can deduct many of their big expenses on properties including mortgage interest, house depreciation and many expenses related to the management of the properties. The value of these benefits can be significant.

The downsides:

Big market risks – Property may be tangible and give people the feeling of security, but this doesn’t mean that it provides returns that are more stable or safer (anyone remember 2007?). When you invest in rental property you are assuming large market risks. The factors that affect property values are complex and unpredictable – just because rental prices have been increasing for the last few years this does not mean they will continue to do so. In fact, many analysts think we may be nearing the peak of a “rental bubble.

No diversification – Just as home prices don’t offer returns that are any safer than most stocks, a house is going to be a huge part of any average person’s total portfolio. For retirement, most financial planners will suggest that you maintain a diverse set of assets, to lower the likelihood of big losses for similar return potential. If you have a house that is 80%+ of your portfolio – your eggs are effectively in one basket. You’ll be taking a lot of risk you aren’t hedged against, for uncertain returns.

Illiquid – If your retirement stocks are falling in value, it’s easy to sell them. But selling your house is a huge headache, takes a lot of time and is very expensive (often up to 5% of the home’s value). Real estate is not liquid and creates additional risks for someone trying to use it as an investment.

Tax advantages complicated and not the biggest – While significant, the tax advantages from rental property investments are typically going to be less than those offered by retirement accounts like 401ks and IRAs. They also require a lot of complex accounting that will create substantial extra work for you. If you are saving for retirement, you’re probably better off minimizing taxes through investing in a 401k or IRA than putting money in rental property.

Managing property is a headache – You probably don’t want a full-time job in retirement, but managing a property can come close to taking a similar amount of time. You’ll have to deal with deadbeat tenants, frustrating repairs and time-consuming renter search processes.

The verdict:

A few years ago, the economic environment may have offered conditions that made rental property an attractive choice for investment. Now, rental yields are coming down while housing prices and mortgage rates rise. If you don’t have a large portfolio that makes owning a home a potential small piece in a broad mix of other assets, then it may be good to sit out the rental income property craze and focus on building other more traditional assets for retirement.

Interested in learning more? Look for more personal finance insights at and follow us on Twitter @guidefinancial

Scott Burns, CFA covers personal finance for issues for Guide Financial, a San Francisco-based startup offering unbiased, comprehensive and affordable financial guidance to the millions of Americans who don’t have access to high-quality advice.

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