Category Archives: Retirement

March 2015 net worth update

Stealing this chart and breakdown from Leigh’s Financial Journey, because I adore how she tracks her networth (and man she’s doing amazing worth saving 80% of her income per month! Inspiring!)

Annual Networth Progress (Goal $400k)

31-Dec-2014 28-Feb-2015 31-Mar-2015 MoM YTD
cash -$2918 $10,646 $10,844 +$198 $13,762
investment (taxable) $144,021 $150,883 $150,096 -$787 +$6075
IRA/401k/hsa/529 $158,971 $166,019 $165,032 -$987 +$7048
net worth $299,894 $327,548 $325,972 -$1576 +$26,078
$ until FI ($2M) $1.7M  $1.67M $1.67M

March didn’t look that great on paper, but really the market was just doing really well in February so a lot of those gains pulled back a bit. I haven’t been very heavily investing in the first quarter of the year as I’ve bene saving an emergency fund in case I lose this job. I’m expecting to be in the job until at least June 30 and likely until Oct/Nov, but that could easily change and be sooner. I need to be prepared.

Overall the year is going quite well. I’m still on track (though I had been hoping to be ahead of target since Feb concluded at my quarterly savings goal. My focus now is really on the next three months – saving as much as possible. If it turns out I get to the end of June and I’ve saved $50k, I can still feel good about that as typically my annual savings/interest¬†goal is $50k. This is just the first year I’m trying to save $100k for the year — which is still somewhat do-able if I were to stay in the job until Dec 31. Honestly, the best thing would be to stay until February so I can max out next year’s 401k, and then figure out next steps. But that’s a long time from now and anything can happen.

I really want to see April end with $10k increase in my account, or $335k. This is possible if the stock market goes up since I’m also putting 80% of my paycheck in April into my 401k (I haven’t put anything into my 401k yet this year.) Furthermore, I just did my taxes and am actually getting $1k back this year. My stretch goal for April is getting to $340k, leaving just $60k for the remainder of the year to save – so this is a very important month. Wish me luck! ūüôā

The Emotional Reprecussions of Narcissistic Parents

No one has perfect parents, and by 30-something you’re supposed to be well adjusted enough to forgive and forget any of their misgivings. I don’t know why I’m still holding out for the day my parents learn how to care about anyone other than themselves, yet that faith consistently proves futile.

When my father was diagnosed with cancer seven years ago and told he had one to two years to live, I spent an evening collapsed on the floor with my friend holding my hand and praying to Jesus for me – which despite my being an atheist Jew was somewhat comforting. Despite growing up as the child of narcissists, and despite being quite self absorbed myself, somehow I’ve managed to learn how to care about others. I’m not very good at expressing this, and I certainly don’t know how to manage these feelings within the context of my family, but I’m learning.

Dad is still alive and kicking. While I had hoped that somehow the stars would align for him to both kick the terminal disease and for having a terminal illness to turn him into a man far less self-centered, I’ve realized this will never happen. The more amount of time I spend away from my parents, the more I can observe their great narcissism. To be fair, they financially took care of me throughout my childhood and then some, and I had a very comfortable childhood, at least on paper.

But that comfortable childhood was spent listening to hours upon hours of my father telling my mother she’s an idiot, throwing curse words at her, screaming and berating her, while my mother nagged about one thing or another, setting him off over and over again. My parents, in many ways, are perfect for each other. There is no satisfying their narcissistic supply, and it would surely drain anyone who actually cared to please the other when such pleasing was impossible.

I may be the type to over dramatize a lot of things in my life, but my parent’s crazy is not one of them. The definition of narcissistic personality disorder defines my father perfectly. My friend from childhood came to visit today and said she was not looking forward to coming over to the house because of my father, as he was never kind to her. She was a bit of a troublemaker as a child, but that was due to her parents both working and leaving her home alone from a young age, alongside her father’s alcoholism and abuse (which I did not know about at the time.) We both had crazy situations at home which is why we bonded, but my father always made it very clear that he looked down on her and her family. Today when she came over, he didn’t greet her in anyway. Yet, when my boyfriend comes over and doesn’t say hi to him, it’s the absolute worst possible disrespect. In short, my father is a great hypocrite, proven time and again, as he constantly cuts others down for faults that if he’d only look in a mirror for once he’d see so clearly in himself.

My father is the more violent type of crazy. He’s what I’d call a bad person. He has no care about how his actions make others feel. It is true that my mother has no care about how her actions make others feel, but typically his actions make others feel unsafe while hers are just annoying or embarrassing at worst. Wouldn’t it be nice for my father to, at least for the short time I’m home to visit, make an effort to make the household hospitable? No, in just 24 hours I’ve listened to him spurt more variations of “Fuck you” and “You’re an Idiot” at my mother than I’d care to count.

Thank goodness my mother has no heart inside of her to care. It’s just same old, same old with her. He seems to no longer physically shove her or grab her anymore, largely due to her calling the cops on him finally years back. Of course, after the police came to pick him up and take him to the station she had to go down and pick him up once he was released. That was the day I was terrified my father might actually kill my mother. She’s always been petite and weak, he’s always been obese and strong – which is a bad combination with a man who has no ability to control his temper and a woman who has no ability to realize she ought to not nag – or suggest any of her own ideas – in order to keep peace in the household.

My mother is no angel. She doesn’t have an ounce of mothering spirit in her body. A friend of hers came over tonight, a woman who was my Hebrew School teacher long ago, and as she asked how I’m doing I explained to her my concerns about having a child and maintaining a high-powered executive job, she briefly stroked my hair in a very motherly sort of way — this was completely off-putting to me, but the motherly-ness of it was kind of nice. She does call my mother out at her self-centeredness from time to time, not that my mother actually internalizes any of this feedback, but sometimes it’s nice to have a third party’s opinion organically in the mix. Makes me feel a bit less crazy.

Then there’s my sister, who, just graduated from college, is thank goodness a good person, yet broken as much as I am from growing up in an abusive household.¬†While my seventeen jarring years at home pushed me towards my bipolar medley, she has also sought help for her depression. She has also been, just recently, leading quite the promiscuous life, because she has no sense of what a healthy relationship is, or how to respect herself or her body. And I feel horrible as her bigger sister not being able to provide any guidance to teach her that she deserves to be loved, and what that means. The fact is both of us have been formally diagnosed with depression, and I’m confident that the root cause of this was more nurture than nature. Who can come out of a household filled with so much selfishness and hatred and lead a healthy, normal, successful life – at least without being heavily medicated?

The Beatles said it best – all you need is love – and for the first 20 years of my life I had no such thing. During my 20s I struggled to learn how to love with a very patient, mild mannered, soothing boyfriend who came from his own broken background. His neglect and my physical and emotional abuse seemed to create two fractured creatures made somewhat whole together. There are days when I look around at other people in society who are perhaps more “normal” or socially able and I wonder what it would be like to be a person who can go out to events and¬†socialize, but then I have to remind myself how completely awkward and abnormal I am, and why we’re the perfect fit for each other, till death do us part. And I remind myself that the only thing I really need to be happy is the love I never had as a child, the forgiving, relentless, eternal love that manages to find equal parts beauty and annoyance in even my many faults.

When I began my career, I had no one. I had never experienced love, I never valued myself enough to be in a healthy relationship with another person I fully respected or who respected me. Sure, I had a few relationships, but these were short lived – a girlfriend who, despite being kind and giving, was far too simpleminded to be a long-term match; a boyfriend who, a risk-loving midwestern guy with a horde of giant dogs and bad jokes and no emotional depth, was no fit for my sensitive side; and another boyfriend, a professional who, despite at the time earning a hundred thousand dollars more than my intern salary, and having been dating for nearly two years, made it clear that I would be paying for everything on every date, down to a $7 movie ticket, and then I’d be sleeping on the living room two-person couch for the night. I was so hungry for love and looking for it in all the wrong places because I had absolutely no respect for myself. I didn’t know how to be loved, or how to be worth being loved.

This is why I threw myself into my career. I wasn’t great at everything I did at work, but I had nothing else to focus on, even when my relationship with my current boyfriend begun, as I was unable to let him in. I found myself, typical as a child of abuse, trying to start fights at every turn, not feeling comfortable just existing in love. I needed the chaos, the ups and downs, the rush of the pain I was so used to. I pushed him away harder than one should be able to push a man and yet he stayed. He stuck he out. He knew I was hurting and lost and we both knew we were perfect for each other even though I tried so hard to break us apart.

Now I’ve gotten to the point where I’ve grown up a bit. I still have a lot of aging to do with wisdom to gain. But now all I need to find happiness is to be hugged tightly in his arms. I don’t need money or a fancy house or nice clothes or a new car or even to travel the world (though I enjoy traveling) because I could spend the rest of my life in a room with him and it would be ok. Suddenly, all of my motivation to focus on my career at the cost of avoiding my broken self shifted to my desire to be able to create a healthy, positive family with him. The years began to fly by and suddenly I was in my late 20s and then 30s. We didn’t get married or have kids, we just kept on watching the years go by, having fun together, but making little progress in terms of starting that family I began to see clearer and clearer.

I know having children is going to be a massive challenge due to my PCOS, and I don’t know how I’m going to manage to maintain my job and go through infertility treatments when the time comes. I’m going to have to make a lot of sacrifices and I will have to be strong enough to do this, not on my own, but as a team of two, us against the world. I’m quite frankly terrified because I don’t want to have kids and be a bad mother – I know I can be a horrible boss sometimes and while that’s not good either, at least with work you don’t always have the same employees throughout your career. One wrong move as a parent and it haunts you and your child for the rest of your life.

My teen self never dreamt of becoming a mother. Now, there’s nothing else in my life that seems more desirable or real. I’m afraid of what happens when I have children and introduce them to my parents, especially to my father’s rage, and how to explain to them that he thinks he’s right all the time even though he isn’t. Then I remember that chances are he won’t even be around when they’re born, or old enough to understand anything. Then I get sad over that, because I do want them to meet their grandfather, even with all of his volcanic anger constantly erupting. And I want them to meet my mother, as she far better plays the role of crazy grandmother than mother, taking pictures of her grandchildren and buying them presents to later be photographed with as well.

I can’t believe how fast time is flying — I’m nearly 32 and I’m not even married yet. I don’t feel behind mentally yet I know biologically the door to have a family is rapidly closing. Between that and the¬†challenge and cost of going through the procedures needed to even¬†children while also maintaining my high-pressure job is frightening. I’ll need to make some big choices about giving up massive savings potential in order to have a family. But at the end of the day, what is the point of saving if you never have a family to share that with (if that’s what you want to do, that is.)

 

Money is an Easier Goal than Happiness

Since 2007, I’ve been writing, on an off, for HerEveryCentCounts. I was reading another 20-something-year-old’s blog and was massively jealous of her networth that was around $250k. I thought about my massive savings account totaling¬†$7k and how my part-time job and internship were not even making it possible to break even every month. I learned a lot about personal finance and got myself a Roth IRA account. I started investing. I pushed myself to increase my income year-over-year. I got to the point, a few years ago, where I made a goal for myself to hit $50k in networth growth, year over year.

What’s crazy is that, after a lifetime of never focusing on one thing long enough to achieve my goals, and even with my life consistently crumbling around me due to my bipolar depression, I managed to hit my fiscal goals time and again. Nothing else made me quite as happy as seeing my networth increase every month in my OCD spreadsheets. I didn’t really know what I was doing when it came to investing, but I kept on putting money into the stock market, especially when it went down, and I saw my networth grow.

At the end of last year when, on paper, I reached $300k in networth, it felt like the biggest accomplishment in my life. I’ve never run a marathon or won a competition. I’ve never really done anything impressive. Hitting $300k at age 30, which was the goal I had set out for myself when I was 22 – at the time when it seemed completely impossible – was achieved. All of the ups and downs over the years seemed to be, at that moment, worth it. $300k wasn’t enough to retire on, but it wasn’t chump change. Suddenly my also unreasonable goal of $500k in networth before having children seemed possible, if I could just hang in there for a bit longer.

My boyfriend does not share in my money-obsessed ways. He saves a bit here and there, but he hasn’t invested any of his money outside of a Roth I convinced him to open when he turned 31. Meanwhile I’m throwing most of my earnings into the stock market, which is maybe dumb, but so far it’s worked out. As of Feb 15, my networth is ahead of monthly target towards my annual goal of $400k (this is the first year I’m trying to achieve $100k networth growth vs $50k.) As of Feb 15, I have $319k in networth. The stock market has performed quite well for the past few weeks, so this upward trend probably won’t last, and there will be pullbacks, but I’m excited to see that 1.5 months into the year I’m already trending towards my goal.

All I know is that I have to work hard for the next two to three years until I have my first child. There is no way in hell I can do the job I have now with children. I may have to change careers at that point, or at the least, accept a lower-paying job in order to be the mother I want to be. I’m strongly considering leaving my state and moving somewhere where I can purchase a nice house with a backyard for $500k, not $1.5M. My boyfriend is open to moving as well. It would be tough because it takes me a while to meet people, and at the least we have a few friends in the area, but I know if we stay in our region I will have to maintain my level of work and simultaneously raise a family. It’s just not going to happen. I see my friends who are parents who are either not working or working from home part time, and I can’t imagine how I would be able to keep my current job, or something like it, and also take care of a young kid.

While saving money, investing, and seeing my networth grow is exhilarating, at the end of the day, it’s my own little semi-secret. My parents still see me as this ongoing series of failures, jumping from job to job every few years. My boyfriend doesn’t care about my savings, which is good, but I don’t get any sort of extrinsic reward from his acknowledgement of my success. I guess that’s why I keep this blog to begin with, because it feels good to impress someone somewhere with my little fiscal victories, month over month, year over year. When you’re an adult no one really gives a shit about the amount of money you saved every month. I guess that’s why people buy fancy cars and big houses – because then it’s easy to show off your success. I don’t need to show it off, I want to be renowned for being the millionaire next door – one day – for being a woman who, despite suffering from crippling mental illness, has saved enough to be able to take breaks from work when depression hits, or when she wants to spend time with her future children instead of spending 10 hours per day working.

Then, I also realize it’s really dumb to want any sort of recognition for saving. Everyone does it. And my own saving has been made possible due to my parents paying for my college diploma, and my graduating without any loans. I’m too scared to dip into my networth to go to grad school, even if it means finding a career that I would be more naturally suited for, so I just hold my breath and hope I can last long enough to see another paycheck come through. I am well aware that my income, strong as it is right now, is likely short-lived. All I can do is push hard and save as much as possible each month —¬†climbing as quickly as possible to my $500k goal.

I know $500k is an arbitrary number. It’s a lot of money but it really isn’t a heck of a lot of money. What $500k means to me is the ability to take a $60k a year job that is meaningful in a state where costs of living are lower, let the $500k grow and use the $60k to cover basic day-to-day costs, along with the income my boyfriend makes. $500k growing at 5% rate over 30 years is $2.1M. So if I can not touch my principal or the interest income until I’m 65, I’d have $2.5M in retirement. That’s how much I think I need for a comfortable retirement. And if it happens to grow at 8% YoY by 65 I’d have $6.3M in retirement.

So that’s why $500k is the magical number to hit before I can start doing things I actually want to do in my life… like being a mother, working part time building my own business, or writing for a local newspaper, or attempting to write my first science fiction novel. I still need to earn an income that covers my annual expenses, but I believe $500k is my version of financial freedom. I would still have to work, because I couldn’t tap into that money until retirement, but I’d be pretty much set¬†as long as my average rate of annual return was at least 5%.

The exciting part of this picture is that the $500k by 32 IS possible, if I can succeed at my job and maintain my current salary for at least two years. I may come out of that with a head of grey hair and a heart attack or two, but I’ll be able to be the mother I want to be.

Feb 1 Networth Progress:

Screenshot 2015-02-14 19.54.19

Hello 2015! Goodbye 2014. And so on…

It has been one hell of a year. Accounting for all that has happened, no wonder I feel mildly overwhelmed. As life speeds ahead, I’m grateful for this one day a year to stop and reflect on how much changes in the course of 365 days. A lot, to say the least.

I’m trying to become a more mellow person, but that’s a struggle. Whatever seems massively important today, unless it has to do with your loved ones or close friends, isn’t really that important at all in the grand scheme of things. When I care too much about everything, that’s when shit starts to hit the fan. Work is work, love is love, and the two should never be accidentally interchanged. I’m not saying that one shouldn’t work hard and get shit done, but the amount of stress I create for myself on this impossible quest to perfection, and the ultimate downfall of such anxiety, is not worth it and it doesn’t help anyone.

In 2015, I’d like, more than anything, to manage a solid and productive year at my current job. This will not only enable me to reach or at least get near my 2015 financial goal of $400k networth (up from $300k today), but it will also provide me with the confidence I need to be highly employable going forward, with a playbook to use which can be followed in any role I take, at least within my specific type of position and industry. It’s creating the playbook that’s hard, especially when you have to learn from trial and error.

In my last opportunity, I realize now that a lot of the challenges there were not my fault. I didn’t make the right plays,¬†for sure, but sometimes young companies have issues beyond what a marketing or sales person can help. Lesson learned there is to never take a job unless I believe 100% in the product and also know there’s a large pain point it is solving.

That’s not to say anything is going to come easy in 2015. I am in a much better situation, but some of the realities are the same as the last and I want to make sure not to make the same mistakes. While I don’t want every year of my life to be dedicated to my career and working long hours, I think 2015 is the year to do it. I don’t have kids yet (but hopefully will soon) and outside of a stable relationship with my boyfriend of nearly nine years, I don’t have much of a social life to speak of, so I might as well invest my 2015 into, as calmly as possible, kicking ass at my job. (And accepting help from the right people who can actually GSD. I.e. hiring smart and making decisions not based solely on resume but on my gut.)

I’m also accepting that there are some things I’m good at and some things I’m not so good at — and I want to forget about that and try my very best to see what I’m truly capable of — if that isn’t good enough for this role or this type of role then, well, I need to figure something else out. I’m hoping that’s not the case, but we’ll see. The difference this time around is that I want to push myself to do whatever it takes to succeed. It is going to be a struggle every step of the way, but what good taste of victory isn’t?

As a working professional, I’m not allowed to be scared, but I am, but I’m also reminding myself that it isn’t worth being scared over succeeding or failing in a job as long as you believe you’ve actually done your best (and you have enough of an emergency fund in the bank to help you through whatever transition needed should you falter.) I have to wake up every morning and ask myself — what needs to get done today? And I need to get that done. Period. No getting distracting on projects that may help the bigger picture but aren’t contributing to your core objective. To succeed at work, you have to be selfish. You have to learn to say “no” a lot. And you have to get results so people trust that when you say no, it’s for good reason.

Outside of work, I hope 2015 will be an exciting year on the personal front. It should be the year my boyfriend proposes to me, which I’m actually excited about given we’re pretty much married at the moment and there is no other person I’d rather spend the rest of m life with. What I have learned about myself is that – while I thought I’d want to marry someone who is career-minded and well-traveled, for many adventures throughout the next however many years of my life, I’m actually much more of a homebody who prefers stability in my relationship. That’s not to say we don’t take trips on occasion, but we’ve yet to travel abroad with each other (my Southeast Asia trip was with a high school friend, not with him) and that’s ok. I’ve discovered that the value of a relationship is having someone to come home to at night, to share a meal with, to watch a movie or tv series with, to cuddle with and wake up next to in the morning. And, of course, to raise a family with when the time is right. All of the other excitement¬†can be obtained outside of a relationship in the form of individual adventures and sharing time with good friends.

2014 has also been a year of seeing my parents go through their own transitions. My mother turned 60, my father, in his 60s, still has terminal cancer, yet is doing miraculously well, #knockonwood, and they’ve been remodeling all of the bathrooms in their home, considering purchasing a condo in Florida to spend the long winters, and surprisingly enough have not killed each other on a series of road trips across their part of the country. I have to remind myself often that I’m now old, and so are they. I mean, 60 isn’t that old necessarily, but 60 year olds are grandparent age, and neither I or my sister have had a child yet, so they’re occupying themselves with a variety of other engagements. But it is strange, how fast life goes, and remembering your parents when you were young, and knowing your time with them, even without accident, is limited. Living far away, if you see them twice a year, for 30 more years, that’s even just 60 more times to say hello and goodbye to the people who made you, and that’s a terrifying thought, no matter how many times they drive you to want to jump off a bridge on each visit.

I hope that 2015 is filled with success, love, and friendships. My resolutions are to go to the gym every weekday (or walk at least one hour with commute), to NOT pig out, binging on crap food just because it is the only thing that helps combat my terrible anxiety, to focus on the primary success metric on my job and relentlessly show results to my boss and team so they can trust me and I can expand to do the things I enjoy most while still delivering unprecedented results, and to spend reasonable amounts of quality time with my family who are across the country, not just my parents, but my cousins, grandparent, and sister. I also want to get rid of tons of shit and live a simpler life.

Finally, my New Years resolution, which is crazy, is that I don’t want to buy anything (other than perhaps a new suit and coat) between now and June 2015, as my focus is on losing weight and saving money. I want to have my 401k and HSA maxed out by March ($20k), following by investing in a post-tax IRA ($5.5k) and manage to save another ~40k-75k through some serious frugality over the year. I can’t focus on that though, as it distracts me from what gets me there, being successful at my job, and growing into an actual executive who looks nothing like the me prior to 2014. Bring it on 2015, I might not be ready for you, but let’s make it happen.

 

Question for my Readers: Should I do a Roth IRA conversion?

One of my biggest financial mistakes to date was rolling over my 401k – or at least, I think it was. By rolling over my 401k accounts I made a Roth IRA conversion of my post-tax “traditional IRAs” unwise. There is, however, a way go around my mistake in order to convert my post tax IRA accounts to a Roth. I’m just not sure if it makes sense to do this. In lieu of hiring a CFA, I pose this question to my readers: should I convert (by doing the following) or not?

The Data

I currently have $14,803 in a post-tax IRA (i.e., I thought I was ineligible for a Roth for two years, at which time I funded a post-tax IRA. This was probably a mistake to begin with, but nonetheless, I have $14,803 in the post-tax IRA. I’d like to convert it to a Roth.)

Where did this money come from?

2010 – $5000 contribution
2011 –¬†$5000 contribution

Thus, I currently have $4,803 in unrealized gains in this account.

If I were to convert¬†to a Roth I would have to pay taxes on this… which maybe not worth it to begin with. However, even if that would be worth it, I have another IRA account from my Rollover 401k. If I were to convert to a Roth I would not only have to pay tax on the $4803, but I’d also have to pay income taxes on the entirety of my 401k account (or a percentage of it, depending on the total conversion.)

The catch is — it is possible to rollover my prior 401k and current IRA account into my new work 401k. At least it looks like it’s possible to do this. By doing this I would no longer have an additional IRA so I’d be able to rollover my post-tax IRA into a Roth IRA and pay tax on “just” the $4803 in gains (or whatever it is at the time I do the conversion.)

However…¬†the funds I have access to in my work 401k are not nearly as compelling as those I have access to in my Vanguard IRA. At the moment, most of my investments in this IRA have a .10 expense ratio. My employer 401k options seem to be mostly in the 1.10 expense ratio, with one S&P fund at .54 or something like that. So, ultimately, I would need to do the math to figure out if it would make any sense to bother with all this hassle to convert my two years of traditional IRA investing to a Roth. I’m really not even sure if I wasn’t eligible for a Roth at the time, but I’m pretty sure it’s too late to fix this error if it was an error. Hmm.

My thoughts are as follows:

1) Wait until the last minute to rollover my current IRA into my work 401k. The last minute mean whenever in the future I am about to leave my company, or, in the case of being laid off, filing the paperwork on the day I’m laid off.

2) If that works, I’d wait until the rollover cleared, and I no longer had an existing IRA beyond the Sharebuilder 2010/2011 contributed-to account.

3) Then I wait… until a year when my income is low (probably when I have my first child or when/if I go to grad school, though this is all a hypothetical time/year to begin with – and needs to happen before I get married!)… and convert the existing post-tax funds to a Roth, so my tax rate is low.

4) That said, does it really matter? In 35 years the account will be worth $415,916 if it makes 10% in interest per year. So I’d have to pay tax in retirement on $405,916.¬†Or, I figure out how to do the conversion in the near future and pay tax now on $5000, give or take. I’m not sure if the tax comes out of the account or you can pay that separately, assuming you can pay it separately then I’d still have $15k or so to compound over the years for retirement, and just pay $2500 or whatever it is right now in taxes on the conversion – if I can actually rollover my old 401k IRA into my new 401k.

But… then I need to look at how much is lost due to the higher expense ratios in the 401k account on the $91k-ish that is in my current IRA. If I have to pay 1% more per year in expenses then…

According to this calculator, if I left my $91k in the new 401k for 5 years, paying an additional 1.00% in expenses each year, with a 10% YoY rate of return, the total fees would be $7885.21, including operating fees and opportunity costs, versus $731.32 if I left it alone in my Vanguard account w/ the .10% expense ratio. So, basically, for the five years waiting for a year when I don’t make that much money (assuming I don’t actually get married) then I’d lose $7500 or so waiting to convert the existing post-tax IRA to a Roth, plus I’d lose whatever tax I’d pay on the gains on the interest gained in the post-tax account. So I’d end up probably paying $10k¬†now¬†in order to avoid paying tax on my hypothetical $405k in retirement.

That seems like a fair trade, if it actually worked out. I’m sure there’s a catch somewhere, I just don’t know enough about finances to see it. That’s why I’m asking my readers… ¬†should I rollover my $91k IRA to my 401k in order to convert my $15k post-tax IRA to a Roth?

 

 

 

 

How to Estimate Your Tax Rate in Retirement

As I’ve been running calculations on whether or not it makes sense to do a Roth Conversion, I came back to the question — what will my effective tax rate be in retirement?

That’s a question a lot of us considering a Roth Conversion should ask, but it’s not one that is easy to answer. What’s important, though, is that the numbers you plug into your calculations are reasonable. After all, expecting a 40% income tax in retirement each year can greatly skew your calculations if in actuality you’ll see¬†a 20% effective tax rate.

This Forbes article by Erik Carter was really eye-opening: Why Your Taxes in Retirement May Be Less Than You Think

Article Highlights 

  • You are probably overestimating what you will have to pay in taxes at retirement
  • Withdrawls from Roth accounts are tax-free at 59.5
  • Social Security is taxed at ordinary income rates but only part of it is taxable
  • Long-term capital gains are taxed at lower rates than income tax (*at least according to current tax law)
  • Your income will probably be lower and put you in a lower tax bracket (i.e. experts recommend 80% of your pre-retirement income, but you may need less)
  • When you are older than 65, you get different deductions than younger people. For instance, you have a $1550 higher standard deduction than us young folk
  • A lot of 401k contributions withdrawn yearly will be taxed at lower rates, especially if you plan on taking out less than $36k per year (note, that’s no where near 80% of my current salary, but I could live on it in another state if I owned a house free and clear)
  • Tax rates could be higher when you retire but that’s unlikely (*not impossible)
  • Lots of people retire in states that don’t have income tax like Texas, Florida and Nevada. (*check out this handy-dandy state income tax calculator and weep… unless you live in a state with low income tax.)
  • Move where all the old people live and you’ll be fine.

Understanding the Roth IRA Conversion Pro Rata Rule & a Great Trick!

IRAs come in two flavors — traditional and roth. Both have income and contribution limits per year in order to take advantage of their benefits. Roth IRAs require that you pay taxes up front on any income you put into them, but then — this is where the magic happens — your interest grows tax free forever. You can take the total amount out at retirement and not pay any tax on it! You can also pass the total amount onto your heirs without them having to pay taxes. It’s a pretty spectacular deal, especially when you’re in a very low income bracket so you aren’t paying much in the form of taxes up front.

Traditional IRAs, on the other hand, are available for low income earners, often who do not have access to a 401k. With the traditional IRA one would put their money in and not pay taxes on this money up front, but then when they retire and take the money out it’s taxed as income for that year (theoretically your tax bracket would be lower in retirement, but this may not be true.)

Up until recently if you made too much money for an IRA you really couldn’t do anything other than invest in taxable accounts. Traditional IRAs were available but you weren’t able to take the tax deduction up front or when you took the money out in retirement, so the only benefit there was the years of dividends not being taxed and reinvested into your investments. It’s not even that great of a deal because then you’re paying income tax rates on your dividend yields versus dividend rates. Generally traditional IRAs for high income earners are useless.

However for tax benefits, today a higher income earner can do a little trick called a Roth IRA conversion. This occurs when the individual puts up to the year’s limit in a traditional IRA ($5500 currently) ¬†and then immediately converts that to a Roth IRA. Because the individual put in post-tax money and the conversion happened right away, no taxes are owed and basically that higher income individual has gone through a loophole to invest in a Roth. For younger folks in their 20s and 30s the ongoing compound interest and ultimate ability to take out the investments tax free might be better (do your own math to figure out if this makes sense for you.)

The trouble comes when you have multiple IRA accounts. Most often this is from 401k rollovers when you leave a job. A 401k is pre-tax money so if you want to roll that over to a Roth you will have to pay tax on not only the interest earned but also the entire amount of basis. That can be an expensive proposition!

That is where the “pro rata” rule comes in. Understanding how this works is a bit challenging. I’ll try to explain this in simple terms based on my research so it’s accurate and makes sense.

How the Roth IRA Conversion Pro Rata Rule works

At the end of the tax year (not the day you do the conversion) the government will look at all your non-Roth IRA funds to determine how much tax you need to pay. They¬†aren’t nice enough to let you get away without paying taxes on a conversion when there is tax money they could make. Instead they require you to pay pro rata on the amount you convert.

Let’s take an example very near and dear to my heart (so I can finally understand what sort of tax liability I’m looking at here.)

I would like to convert my current IRAs to Roth IRAs before rolling over my high-fee 401k (*or I need to get a new job with a better 401k as I can rollover my 401k to that so I can continue to do Roth conversions year after year.)

Vanguard IRA (from rollover 401k)

$26,987 (all pre-tax)

Sharebuilder IRA

$14,027.47 ($10k is post-tax, $4027.47 is pre-tax)

Due to the pro-rata rule it is not possible for me to rollover just the $10k of post-tax money today.

If I rollover the $10,000 of post-tax money, the pro-rata rule would take my total amount of IRA money $41014.47 to determine how much I actually owe.

To figure this out for yourself, follow the steps listed here.

1. Total up all of your IRAs (non Roth): $41,014.47
2. Total up all of your after-tax dollars in IRAs: $10000
3. Calculate your % of after-tax dollars: 24.38%
4. Determine the taxable amount of your distribution: ($20,000 distributed = $4876 tax free, $15124 taxable(!))
5. Exception for rollovers to a company plan: n/a

In order to take out the full $10,000 of post-tax money, I’d have to¬†convert the entire amount ($41,014.47) and pay taxes on $31,014.47.

Is either scenario worth it? Let’s play this out to the conclusions…

Assumptions:

  • 35 years growth
  • .05% average¬†interest rate
  • 30% federal and 10% state tax in retirement (40% taxes)

1. I do nothing, and leave my $41,014.47 to grow for 35 years until I turn 65 and retire.

  • $226,235 pre-tax
  • Total Value = $135,741 (@40% tax bracket)
  • ((15% tax bracket, in 0% income tax state, low annual withdrawals, would = $192,229))

2. I convert 25% of my IRA plans today

  • Pay tax on $15,124 at today’s tax rates (28% fed, 10% state – $5747.12 in tax)
  • Have $14252.88 remaining to grow tax free forever
  • $78,619 post-tax on conversion
  • + $116068 * 40% tax = $69640
  • Total Value = $148,260

3. Just for kicks, I convert 100% of my IRA today, paying tax on $31,014.47

  • Pay tax on $31,014.47 at 38% rate — $11785.50 in tax paid today
  • $29228.97 remaining to growth tax free forever
  • Total Value = $161,227

4. Additional test thrown in — low income year, 25% tax today

  • Pay tax on $31,014.47 at 25% rate — $7753.61
  • $33260.86 remaining to grow tax free forever
  • Total Value = $183,467

What do these calculations teach us?

  • The value of a Roth Conversion (if you have both deductible and non-deductible IRAs) is determined largely by your current tax rate and your expected tax rate in retirement (oh fun, guessing games.) Apparently people tend to overestimate how much taxes they will pay in retirement (i.e. maybe my 40% estimate is too high. You think?)
  • The conversion for an account that looks like mine MAY make sense if I can hold it for 35 years or longer. But it’s still not a sure bet. (I calculated everything at a 5% return YoY to be conservative.)

When Does the Roth Conversion Not Make Sense?

I haven’t done all of the calculations, but I assume at some age the roth conversions do not make sense UNLESS you have no taxable money to deal with. If you don’t have many years for the interest to compound and make up for what you paid in tax, then you’ve just paid a lot of money to the government to make less in the end. That’s what they want you to do. That’s what a lot of people who aren’t running the numbers are going to do thanks to this new rule.

When Does the Roth Conversion Make a Lot of Sense?

If you have one year of your life where you happen to not be making a lot of money — maybe it’s a year you went to school or took time off to have a kid — you will be able to do the conversion and pay your income tax on that conversion. If you are single and have no income, your first $36,900 of taxable conversion (or mix of conversion amount and income) is taxed at just 15% (the first $9600 at 10%.) This changes the numbers quite a bit!¬†So say you want to convert $20k with $10k of it non taxable and $10k taxable. You pay $1k on the first $9600 and 15% on the $400 ($60) so you’d pay just $1060 to convert your $20k, leaving you with $18940 to grow tax free forever — if you live in a no income tax state, anyway (most states will charge you income tax so factor this into your calculations as well.) That’s still a pretty great deal, but you’re also losing all of the money you could have made that year and put into your investment accounts, so it’s not worth it to do this unless you are already planning to take the time off. (And if you really want to be tricky move to a state with no income tax and don’t work for a year!)

(Note, married couples can stay in the 15% tax bracket up to $73,800 income including the taxable IRA conversion amount.)

The Best Trick I’ve Found (That is legal, at least for now)

If you have a work-sponsored 401k, find out if it allows you to “reverse rollover” pre-tax IRA investments. If you can do this, take all of your pre-tax IRA investments and move them into your 401k. You will have to keep those investments in the 401k until you change jobs again (and at least for a year) so if the 401k offers crappy, high-fee, high-load mutual funds you’re going to want to run all the numbers in your specific situation. That said, if you have a decent 401k and can rollover your funds into it — you can roll them over and then only pay taxes on ¬†your interest on any post-tax IRA contributions for the Roth conversion. This means that you can save a lot of money and do a few years of IRA conversions to grow your roth (esp if you are a high income earner and are already maxing out your 401k.)

Now that I’ve figured out this is do-able, I’ve immediately decided to rollover my existing crap high-fee 401k into my Vanguard low-fee, no-load Admiral funds IRA account. I’ll let those babies grow until I have a nice 401k at a future job (knock on wood) that lets me roll over my IRA for a while, and I’ll convert at least the $14k of traditional IRA investment plus probably another $5.5k for the current plan year. I will have to run the numbers myself at the time but I think this is probably the best idea.

Even if that doesn’t work out, the actual growth on my pre-tax accounts will still be beneficial and perhaps my actual tax rate in retirement won’t be quite as high as I think it will be. It still might be best just to leave these accounts alone and continue putting $5.5k in a Roth every year that I’m eligible, whether I’m in school and working part-time or unemployed and unexpectedly coming in within the income limits to contribute to a Roth.

Have anything else to add? Think I don’t explain this well?

Leave a comment with your tips and ideas for when a Roth IRA conversion makes sense, and when it doesn’t. Did I get something wrong here? Let me know. Thanks!

 

Should I Rollover My 401k? The Cons

Common financial sense says that you should rollover your 401k into an IRA account as soon as you leave a job. Besides keeping all your financial accounts in one place (so you don’t have a bunch of orphan 401k accounts floating around), fees on typical 401k accounts are painfully expensive (remember in our last post we discussed how after 30 years on a $100k investment every .10 increase in percentage points will cost over $50,000 in fees.)

However, there are some lesser known reasons why you should leave your 401k where it is, at least for the short term.

1. Penalty-Free Retirement at 55 vs 59

The government isn’t ok with you withdrawing funds from your IRA before 59 1/2, but for some reason you’re allowed to withdraw from your 401k at 55. This doesn’t make any rational sense but government rules never do (source)

2. Roth Conversions Get Much More Expensive After a Rollover

A few years ago the government made another rule that doesn’t make any sense — you’re not allowed to contribute to a Roth IRA (i.e. after-tax money that you can take out for free in retirement and that you can pass on to heirs tax free) BUT you are allowed to put money in a traditional IRA, post-tax, and immediately convert this to a Roth IRA tax free. (Did I mention the government makes NO FREAKING SENSE?) However, if you have additional IRA funds, especially ones you haven’t paid tax on yet, you have to pay a pro-rata fee for the percentage you want to convert. I’m going to write a separate post about this pro-rata rule because it’s so complicated I don’t even understand it yet, but basically once you have more funds in traditional IRAs you’re liable for tax on part of them as well if you want to do a Roth conversion, and this can be very expensive and eat into your future earnings (source)

3. Better Creditor Protection

In yet another rule that makes no sense (notice a trend here) 401ks are protected more than IRAs in the case of lawsuits and such. How screwed you are in the case of a personal liability lawsuit depends on what state you live in. For example, New Hampshire and New Mexico have no protection against creditors for your IRA, whereas your 401k can’t be touched. (Say it with me now – this doesn’t make any freaking sense!) In some states, such as Texas, Arizona and Washington, your IRA is treated with the same protection of a 401k , so this rule wouldn’t apply to you (source)

4. Fees Can Be Lower (Though This is Unlikely)

Often the 401k offers access to different funds then you would have access to as an average investor. A lot of articles argue that you could be better off staying with a 401k funds… but make sure to look into the fees of these funds. Mutual funds can cost 1.4% per year or .80%, but those are still high fees compared to a basic Vanguard fund at .10% to .25%. Ask yourself if you really think this fund will perform better than an index fund (hint – it probably won’t, or at least not enough to make up for lost earnings due to fees) (source)

Can you think of any other reasons to keep your 401k at your old employer? #2 and #3 seem to be the best arguments. Tomorrow I’ll share a post that further explains Roth conversions – because they confuse the heck out of me so I need to do some better research, and I’ll share my findings with all of you!

Vanguard Admiral Funds: Rebalancing for Lower Fees

One of the things I realized recently that I’ve been spending more than I have to on fees inside of my IRA accounts. While Vanguard funds are low fee to begin with, did you know that Admiral funds (which require $10k minimum investment per fund vs $3k) still have significantly lower fees?

Fees can significantly eat away at your investments, especially over time in your retirement accounts. I know for a fact my old 401k that I haven’t rolled over is wasting money with some of its funds at .90% fees or higher! I’m holding off on rolling that over in the case I will do a Roth IRA conversion if/when I go to grad school on about $100k of other IRA investments, but for all my other accounts I want to be as fee-efficient as possible.

Expense Fees Add Up Fast!

Here’s a little experiment… (try your own out in this expense ratio calculator) say I invest 100,000 today and plan to keep that money invested for 30 years. I earn an average of 10% each of those 30 years (woohoo.)

If my fund has a low .10% expense ratio then I’ll see a 2.96% reduction of my future value due to fees (costing $51,596.) This sounds like a lot, but it really isn’t compared to the cost of most funds.

Say you have a still relatively low-cost fund at .20% expense ratio. You are then spending 5.83% of your future value on fees ($101,716!)

Some funds have high expense ratios too. If you are investing in a fund that has an expense ratio of .80%, 21.51% of your future value is gone thanks to this fee ($373645.77!!) So you see how a little expense ratio can quickly add up.

After reading a bit more about taxes and what funds to hold in Roth IRAs vs traditional IRAs I decided to shift around funds in my Vanguard accounts. I also changed things up over at Sharebuilder because my $10500 basis Roth over there is significantly underperforming, but I’ll cover those changes in another post.

Also, I read that high-dividend funds make sense in your Roth IRA but not in your traditional IRA. Why? ¬†Because dividends have two purposes — to provide you income today at low(ish) capital gains tax rates, or to compound over time in your investments and to be taken out tax free upon retirement (in a Roth.) Going high dividend in a traditional IRA is silly because you have to pay income tax on it when you retire and take it out — i.e. those proceeds would be cheaper today in a taxable account!

Until today, my Vanguard IRA accounts looked like this:

Traditional IRA

VDAIX / .20%
VHDYX / .19%
VGSIX / .24%
VTTSX / .18%
VGTSX / .22%

Roth IRA

VFIFX / .18%
VTSAX / .05%

Updates to my Portfolio

While there was nothing wrong with this breakdown, per se, I had high-dividend REIT and dividend growth funds in my traditional IRA while I had index growth funds in my Roth. I also had certain funds split between my Roth and Traditional IRA where because I had $10k split between two accounts I couldn’t qualify for the lower admiral fund rates.

Luckily at Vanguard it’s free to trade your funds inside your account, so rebalancing is easy (unlike at Sharebuilder where I’m wasting tons of money trading and will eventually give in and just move my “fun money” to Vanguard.)

I made quite a few (free) trades at Vanguard to fix my portfolio. Here is what I have now, which, as you can see is greatly simplified:

Traditional IRA

VIGAX / growth index fund admiral shares .09% expense
VTIAX / admiral version of VGTSX¬†— .14% expense vs .22%

Roth IRA

VDADZ / dividend appreciation index fund — .10% expense ratio
VGSLX / admiral REIT fund — .10% expense to .24% of VGSIX

I also killed off all of my “target retirement date” funds because I’ve read they are too conservative and at my ripe young age of 30 I want to be aggressive but not stupid (working on the not stupid part.)

Why keep my Sharebuilder account open at all?

Good question! Mostly I keep it open so I can trade precious metals in my Roth IRA (i.e. GLD) since they are taxed at a collectible rate (high tax) unless they’re in an IRA, and I can’t buy gold or silver in my Vanguard fund. I also have some specific REITs which I like to watch to learn more about REITs because they are interesting — especially since I do not actually own any tangible real estate. More on that later.

OMG: 36% of Americans Have NO Retirement Savings

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The concept of “retirement” always seemed a bit funny to me — after all, why save up all of your recreational time for the years when your body is expediting its rate of decomposition? Retirement wasn’t always a thing¬†just as engagement rings were not always a¬†thing (read a good recap of how retirement came to be on The New York Times.)

It turns out that when you’re older, keeping your mind and body busy with work can help you live longer (no really, it’s proven that retirement has a detrimental¬†effect on health in old age.) Research from the Institute of Economic Affairs and the Age Endeavor Fellowship found that both mental and physical health can suffer — increasing the likelihood of clinical depression by 40% and having a diagnosed physical condition by 60%. That said, not everyone has the luxury of working until they kick the bucket, even if they wanted to, and even if it would be better for them statistically speaking. Between disabilities caused by your body slowly falling apart and the fact that many employers just don’t like old people, most employees stop work well in advance of the time their soul peaces out.

For “us millennials” we have this opportunity to determine what we want in our retirement or non-retirements, to at the least have a choice that many boomers now don’t have because of the great recession. Continue reading