If you have not yet done so, please read part 1, part 2, and part 3 of this series first, then read on.
Last week, I discussed the classic MMA example. $5000 net income each month. How much income would it take to net $5000 each month? Ignoring state taxes, I calculate $81,000. Here’s my math;
| Gross | 81000 |
| 401k | 8100 |
| Net | 72900 |
| Item | 16000 |
| Exemptions | 7000 |
| Net Taxable | 49900 |
| Tax | 6683 |
| SS | 6197 |
| Net Income | 60021 |
The first point I’d make is this; $81K is an income that puts a family close to the top 20% of earners, it’s not average by any means. Yet, this is the example that’s out there. Second, I’ve been reading how our saving rate has gone negative, as a country. It’s pretty convenient that the example chooses a couple who can manage after saving 10% to their 401(k) to still have 20% of their net income still available to pay down their mortgage. Of course, there is no budget offered in any example. Just observing the economy and human nature tells me that few people would be able to come up with that kind of money and actively choose to take all of it and apply it to their mortgage. Problem is, if they showed you an example using just $100 extra per month the savings wouldn’t be so dramatic (a 24 year, 6 month payoff, hardly the 10.4 years! you can get by prepaying $1000/mo) and you’d be less inclined to part with your $3500. Agents will tell you there are qualifications for the client to pass before being sold the program, but I have yet to hear of one getting rejected. For that matter, one can become an agent by having the high credentials of a breath and a pulse, little more.
Next week – a discussion of the “HELOC shuffle”.
Joe
From reading the posts of many “satisfied clients” of MMA, I think you give them too much credit to be saving that much in a 401(k), or itemizing for that matter. But that’s just my perception. Keep up the good work on all the threads you post on!
L2G
You are probably right on that thought. Which is why a real financial planner would want little to do with such a product, as there’s an inherent conflict involved. Since no agent wants to lose a sale, they conveniently ignore those other things one should apply their money to first. In an upcoming post, I plan to address the mistake any client makes by foregoing a matched 401(k) in favor of the aggressive mortgage paydown.
Joe