Investing 102

[GregWeld]

BTW --- This thread isn't about "me"..... I'm already set. What I'm trying to do is to get those that aren't - to start thinking about how they might go about getting there!

Are you willing to trade your retirement years "in style" for a new car you don't really need - but just "want" - now? Or that bigger house you don't really need? Or the expensive trip to Hawaii over the moderate trip to So Cal?

The more I hear people say "well... I can afford it".... because they have higher incomes... the more I question them and say -- OKAY.... do you still want to be able to live this way when you have no job (retired)? And how much money do you think that will take?

Right now -- it takes a million bucks invested to "net" about 40 grand a year in income... So if you're making 100K a year - you now need TWO MILLION in the bank!

I just had a discussion with the buddy that handles my bond portfolio... I have a years worth (due 2012) rolling over in the next 6 months...so we were discussing what kinds of return I can expect. Ya know what? We're going to roll this years into bonds due 2019 and MAYBE I'll get 3% tax free.... Do the math -- that's 30 grand a year net off ONE MILLION BUCKS invested. Sucks but that's what it is! If you want super safe instead of A rated bonds - you can drop to well under 2%!

Now... it won't stay that way forever... but in order to get my money back I MUST hold until maturity... so that's dead money until 2019 folks. Think about that! In my book - that's a long time! Next years bonds will roll into 2020's and so on. I hope rates don't go DOWN between now and then!

[Bucketlist2012]

Greg..

Exactly.. I am trying to get the Wife to understand that.

I can spend a certain amount for life, or buy "wants", and end up broke.

People don't realize how much money it takes to live on after they stop working.

Another formula is you need 15 times your yearly salary, Invested to make it work. If you plan to live on less.

I am working on having 18 times my old yearly salary to make it work..

Right now it is tough to make money. I would love to lock in a CD at 11%.

[SLO_Z28]

Youd be surprised how cheap you can live if motivated, all my bills combined are $1300/mo. Even my dad lives quite well off $1000/mo social security income.

Anyways on to some planning, I can retire at 59 with 90% of my pension for the rest of my life(government pension, costs 10% of my salary), should I buy a house now and amortize the hell out of the loan by paying double the payment on a 15 year loan then put the entirety of my house payment into a 457(b), or just make regular payments on the house and pay the excess into my 457 thus reducing my tax burden. Basically im asking is it better to pay down a debt at 3% and gain equity and defer investing for 7 years(how long it should take to pay off a house), or invest for the entirety of those 15 years at the 457 maximum? If I invest the full amount into the 457 I can lower my federal tax rate to 15% (I have a 48,000 salary that when reduced to 43,000 by the 457 contributions drops me to a 15% tax bracket from the 25% im at now), so I would guess that the tax deferral would be worth it?

[Bucketlist2012]

Originally Posted by SLO_Z28

Youd be surprised how cheap you can live if motivated, all my bills combined are $1300/mo. Even my dad lives quite well off $1000/mo social security income.

Anyways on to some planning, I can retire at 59 with 90% of my pension for the rest of my life(government pension, costs 10% of my salary), should I buy a house now and amortize the hell out of the loan by paying double the payment on a 15 year loan then put the entirety of my house payment into a 457(b), or just make regular payments on the house and pay the excess into my 457 thus reducing my tax burden. Basically im asking is it better to pay down a debt at 3% and gain equity and defer investing for 7 years(how long it should take to pay off a house), or invest for the entirety of those 15 years at the 457 maximum? If I invest the full amount into the 457 I can lower my federal tax rate to 15% (I have a 48,000 salary that when reduced to 43,000 by the 457 contributions drops me to a 15% tax bracket from the 25% im at now), so I would guess that the tax deferral would be worth it?

Personally at 3%, I would not double down on the loan payment, and I would Invest that money.

That is without the tax reduction. With the tax reduction , I would for sure keep the loan and Invest the rest. That is an additional 10% for you in tax savings, and you should be able to get more than 3% on your Investments. IMHO.

Now we need our resident Math experts to chime in and share their thoughts..

[GregWeld]

With these low fixed rate loans available now - there should be absolutely no rush whatsoever to hurry to pay them off.... And what you really hope for is raging inflation so that your investments produce higher yields! If you're paying 3 and making 7 it's pretty no brainer to me.


Equity in a house really doesn't produce anything except peace of mind... because you have to live somewhere regardless. The only reason anyone wants a paid off house is to have it paid off at the same time you retire - to reduce monthly costs. But even that goes away if you have more than adequate income.

If you invest - and re-invest the dividends your investments should double every 7 to 10 years... and your payment will stay fixed... and over that same period your income should increase - making your fixed payment even cheaper.

So - save now - invest now.

[Lenie]

Originally Posted by GregWeld

With these low fixed rate loans available now - there should be absolutely no rush whatsoever to hurry to pay them off.... And what you really hope for is raging inflation so that your investments produce higher yields! If you're paying 3 and making 7 it's pretty no brainer to me.


Equity in a house really doesn't produce anything except peace of mind... because you have to live somewhere regardless. The only reason anyone wants a paid off house is to have it paid off at the same time you retire - to reduce monthly costs. But even that goes away if you have more than adequate income.

If you invest - and re-invest the dividends your investments should double every 7 to 10 years... and your payment will stay fixed... and over that same period your income should increase - making your fixed payment even cheaper.

So - save now - invest now.

Great thread, would love to sit and pick your brain one afternoon over a coke.

[GregWeld]

Originally Posted by Lenie

Great thread, would love to sit and pick your brain one afternoon over a coke.

Bring it on buddy! You know where I live!

[Woody]

Originally Posted by SLO_Z28

Youd be surprised how cheap you can live if motivated, all my bills combined are $1300/mo. Even my dad lives quite well off $1000/mo social security income.

Anyways on to some planning, I can retire at 59 with 90% of my pension for the rest of my life(government pension, costs 10% of my salary), should I buy a house now and amortize the hell out of the loan by paying double the payment on a 15 year loan then put the entirety of my house payment into a 457(b), or just make regular payments on the house and pay the excess into my 457 thus reducing my tax burden. Basically im asking is it better to pay down a debt at 3% and gain equity and defer investing for 7 years(how long it should take to pay off a house), or invest for the entirety of those 15 years at the 457 maximum? If I invest the full amount into the 457 I can lower my federal tax rate to 15% (I have a 48,000 salary that when reduced to 43,000 by the 457 contributions drops me to a 15% tax bracket from the 25% im at now), so I would guess that the tax deferral would be worth it?

You have to answer that question by analyzing risk vs. return. Paying off your loan early is a guaranteed no risk investment which produces a rate of return equal to the interest rate you are paying. You could also invest that money elsewhere such as the stock market in anticipation of getting a higher return (7% to 10%). If you invest in the stock market instead of paying the loan off early, you are taking on more risk in anticipation of a higher return. So it becomes a personal descision on whether you are willing to take on more risk to get a higher return. The risk is higher in the stock market because it is not a guaranteed return. The market may indeed go up 7% to 10% a year over the next 15 years, but there is a chance it will not go up at all, decline or even go up more than 7% to 10% a year.

You can also look at it and rate risk on a scale of 1 to 10 where 1 is a no risk investment with a low rate of return where 10 is a high risk that has the potential for high return, but also the change of loss. Paying off your loan would rate 1 or 2 whereas investing the money in the stock market maybe a 5? Where is your comfort level on the risk vs. return scale?

It is similar to asking should I invest in government bonds where I have a safe rate of return or invest in corporate bonds where the risk is higher, but the potential return is also higher. How safe do you want to be?