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 21

I’ve frequently said to “do the math” and this guest post just helps drive home this point –

When you’re figuring out where to put your money, you have to do a lot of math and planning. The planning part is to help you figure out how to amortize your finances throughout your life, and the math part is to make sure you get the best possible return on your investment.

Today we’re going to look at online savings accounts, but first I want to focus just a bit on these two questions of math and planning, so you understand where I’m coming from.

How much money do you have, and when are you going to need it?

This is always the first set of questions you need to ask yourself before you put your money into any type of savings vehicle, from an online savings account to a Roth IRA. How much money do you have right now? Do you plan to earn more money that can be saved (vs. money that must be spent right away) in the future? Do you expect your earnings to grow over time, or do you expect your earnings to decrease soon? (A young person starting a career might expect earnings to grow; a couple planning a family might expect earnings to decrease if one partner quits a job to take care of the baby.)

When are you going to need your money? Are you planning to buy a house? Move to another state? Do you anticipate becoming the primary caretaker of young children or aging relatives? Do you want to go back to school?

Before you can start thinking about how to save and invest your money, you have to take some time to answer all of these questions.

Understanding money math

Once you’ve taken a look at the planning question, it’s time to start understanding all of the mathematical terms involved in saving money. Do you know what APY means, for example, and how to calculate it? Do you know whether a given interest rate is calculated daily, monthly, or yearly? Do you know how to effectively calculate the risk of any given investment?

If you’re not up on your money math, it’s time to take a refresher course. Joe Taxpayer has many great articles on how to calculate the true value of investments, savings accounts, and financial opportunities. Take some time to read through this site, and learn how to apply Joe’s tips to every new financial offer you encounter.

Online savings accounts: a good mathematical solution for short-term savings

There are a lot of solid, fixed-rate investments out there, including certificates of deposit (aka “CDs”) and goverment-backed Treasury bonds (not to be confused with Treasury bills — and read this if you want to learn all of the math behind Treasury securities).

However, one of the most solid investments out there, especially for new savers, is the good old-fashioned savings account. Compound interest is one of the first lessons we learn, financially, and it still applies. An online savings account is even better than a brick-and-mortar savings account because the money saved on overhead goes back to you. Online savings rates by Discover Bank, for example, are at 0.80% APY as of November 14. That means that if you put an initial $1,000 in the account, then add $200 every month, by the end of the year you’ll have $3,418.39 including interest.

Why are online savings accounts good mathematical solutions for short-term savings? Because any gains made by putting your money into a higher fixed-rate investment, such as a CD, are wiped out if you have to pull that money out early. Remember the questions we looked at earlier regarding when you think you’ll need your savings. If you put all of your money into a 24-month CD, and then you decide to get married/buy a house/have a baby, you have some problems to solve.

If you’re thinking short-term, the online savings account with a high interest rate is the way to go. Or, if you’re thinking medium- to long-term, combining an online savings account with some longer-term investments is a great way to have money when you need it as well as plan for the future.

If nothing else, your money should at least rest in an online savings account before you transfer it to your Roth IRA or 529 College Savings Plan. Every day you have extra money is a day it needs to be earning interest for you — and online savings accounts are set up to help you make that happen.

In conclusion: the next time you come into some savings, start thinking about math and planning. If you plan on spending your money soon, put it in an online savings account; if not, use what you know about money math to find the best possible long-term investment.

written by Joe \\ tags: , ,

Sep 29

A busy week, with some great articles to discuss. At Bargaineering, Miranda gave some guidelines on How to choose between a traditional 401(k) and a Roth 401(k). It takes a bit of math and analysis to calculate the better option, and Miranda’s advice helps provide some insight to this process.

At Monevator, Why I’m not paying off my mortgage. The math is simple, his mortgage is currently 1.24% The Accumulator is comfortable his investments will beat this rate long term, so instead of paying off the mortgage, he’s staying fully invested. This issue has people on either side and a whole bunch in the middle. I’m in the group that will be paid off before retiring, but not in a rush to accelerate payments to end it sooner. How about you?

Len Penzo tells it like it is, he doesn’t mince his words. And it seems neither do guest posters at his blog. This week, Joe Saul-Sehy advises, Don’t Be a Moron: How One Man Paid $87,500 in ‘Moronic’ IRA Fees. You read my delightful and informative article A 401(k) is not an investment? This one could be a great follow up to it, alternately titled “An IRA is not an investment.” Against all the good advice Joe S had to offer, a client “cashed out” his IRA, and was left with a huge tax bill and penalty. The title was slightly misleading, to me a fee is something else, but the story brought a tear to my eye as I considered how many hours the story subject must have worked to earn this money, and it was gone with one stroke of a pen.

At I Heart Budgets, Jacob asked a question – What’s Your Percentage? He’s saving 6% of his income and would like to increase this number to help pull in his projected retirement date. A nice goal, Jacob.

Ninja at Punch Debt in The Face tells us, “I hate paying for things that we don’t use.” I don’t blame him. It’s bad enough to spend money on the necessities, but to see it go towards things you don’t use is just awful. No Netflix for me, either, Ninja.

written by Joe \\ tags: , , ,

Jul 14

Money Mamba shared why if you’re Bad at Math? You’re Screwed. As JT offers, this may be stating the obvious, but a study recently was published showing that math skills correlate to sound financial decisions.

At Bargaineering, How Financially Literate are You? 5 simple questions, can you get a passing score or maybe all 5 correct?


Abigail asked if anyone else feels guilty using Groupons? She’s specifically referencing the local deals, restaurants or services that are available on Groupon deals. She has a kind heart to worry that she may be causing a loss for the seller of such deals. If I use a service and it’s a good experience, I’d plan to use that service again. For a restaurant, I’m careful to tip on the pre-Groupon cost. When you add drinks and maybe dessert, the restaurant made its money. A number of restaurants in my area seem to offer these deals again and again. I doubt they’d do this if they lose money on these deals.

At The Big Picture, Barry Ritholtz asked Is Gold Overdue for a Bounce? In one of the comments to this article, Barry quotes my gold article from last week. Honoured to be quoted by this financial author and frequent CNBC guest.

Next, The Main Reasons Why People Want To Quit Their Jobs. Sam explains, it’s not always about the money, and offers the real reasons people leave.

We’ll close this week with Darwin’s How Inflation Screws the Poor the Most a look at how inflation may help the well off, but the poor, not so much.

Have a great week.

written by Joe \\ tags: ,

Jun 02

Let’s start this week with Andy Hough’s My Retirement Blog. Andy wrote why you should Take Advantage of a Stretch IRA, along with excellent examples of the kind of withdrawals required at various ages. The difference between taking the money and running and taking the deposits over the years can be huge. As long as the tax code still permits, consider the stretch if you are fortunate enough to inherit an IRA account.

Still on the IRA topic, at 20 Something Finance, G.E. Miller wrote Roth vs. Traditional Retirement Accounts: Why Roths are Not Always the Clear Winner. You see, there’s a bit of forecasting required, what bracket are you in now, and what might it be in the future? Those who retire with all their money in a Roth IRA have left money on the table, or worse, in Uncle Sam’s pocket.


Barb Friedberg asked (and answered) What Happens When Fed Exits From Stimulus? Yes, that’s the million dollar question. No, I’m not going to give you the punchline, just tell you that Barb offers a great discussion on the topic, tell her I sent you.

The discussion surround Apple and its offshore cash hoard seems to be fading in the news. One last article on the topic from Robert D Flach, the Wandering Tax Pro. Robert says Don’t Blame Apple, and agrees that they are simply following good business practice. If you have a congressman who is your friend, neighbor, or just in your pocket, why not tell them to suggest that the fault isn’t with Apple, but with our tax code, It’s congress’ job to fix this.

Andy Hough also guest posted at Tight Fisted Miser. He was still stretching, but this time he wrote How to Stretch your 5% cash back. A clever strategy to get 5% on more than just the select categories your card offers that quarter.

We’ll close this week’s roundup with William Cowie’s guest post at Five Cent Nickel – What do you do with your windfalls? A great question, as I often observe how people will treat their tax refund as a windfall, yet, it’s money out of their check every pay period. Check out Will’s thoughts on windfalls.

I’ve been tinkering a bit with a PB blogger feed. A page of the last couple posts that bloggers I follow have written. So far My Favorite PF Bloggers  is how I follow the PF bloggers I like best.

written by Joe \\ tags: , , ,