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PBS Frontline : The Retirement Gamble, sorta Must See


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16 hours ago, fantasycurse42 said:

@Dentist Had mentioned something like this before. My tax guy has left me even more confused for something that should be pretty simple.

I have an employee sponsored 401k, that should have zero to do with this conversation, but I mention it in case I am wrong.

I'm looking to start a Roth IRA, issue is I can't due to the income restriction. What I can do is a backdoor Roth IRA, which is what Dentist previously mentioned. 

I can start a traditional IRA, as soon as I initiate my positions, I can then roll it into a Roth IRA - so if I have each account set in Schwab, basically I'm depositing $5,500 into the traditional IRA account, buying the position and calling them to convert it to my Roth IRA? Is that it? I can rinse and repeat and set it up for my wife too?

I already filed my 2016 taxes, if I do this before April 18th, would that mean I have to amend my 2016 taxes? 

Don't buy the position in the traditional IRA.

Put the money in,  convert withing a week or two,  then buy your position.  Basically you want to convert the money before it gains even 1 penny of "interest" they pay on the account.

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16 hours ago, fantasycurse42 said:

@Dentist Had mentioned something like this before. My tax guy has left me even more confused for something that should be pretty simple.

I have an employee sponsored 401k, that should have zero to do with this conversation, but I mention it in case I am wrong.

I'm looking to start a Roth IRA, issue is I can't due to the income restriction. What I can do is a backdoor Roth IRA, which is what Dentist previously mentioned. 

I can start a traditional IRA, as soon as I initiate my positions, I can then roll it into a Roth IRA - so if I have each account set in Schwab, basically I'm depositing $5,500 into the traditional IRA account, buying the position and calling them to convert it to my Roth IRA? Is that it? I can rinse and repeat and set it up for my wife too?

I already filed my 2016 taxes, if I do this before April 18th, would that mean I have to amend my 2016 taxes? 

While it isn't part of the conversion, if you're maxing out your 401K you shouldn't need to worry about amending your tax return because you won't be able to deduct these new contributions. Someone can correct me if I'm wrong but pretty sure I had the same issue a couple years back. 

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1 hour ago, Dentist said:

Don't buy the position in the traditional IRA.

Put the money in,  convert withing a week or two,  then buy your position.  Basically you want to convert the money before it gains even 1 penny of "interest" they pay on the account.

This seems too basic, why would they even have an income restriction? 

Just to be clear, my steps are as follows, and that is it:

  1. Open traditional IRA (I already have added it in Schwab alongside 401k, the account opened and labeled contributory)
  2. Open Roth IRA (already have opened in Schwab, labeled by them as Roth Contributory IRA)
  3. Deposit $5,500 into contributory account
  4. Call Schwab and ask to convert money into Roth IRA account
  5. After converted, buy longterm holds for stocks, bonds, etfs, etc. etc.
  6. Profit

Is that it? Can I contribute still for 2016 before 4/18? If I can and have done my taxes already, will they need to be amended? Technically, can I add $5500 now (for 2016) and then $5,500 after the 18th for 2017? Rinse, repeat for the wife as well? 

TIA

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2 hours ago, fantasycurse42 said:

This seems too basic, why would they even have an income restriction? 

Just to be clear, my steps are as follows, and that is it:

  1. Open traditional IRA (I already have added it in Schwab alongside 401k, the account opened and labeled contributory)
  2. Open Roth IRA (already have opened in Schwab, labeled by them as Roth Contributory IRA)
  3. Deposit $5,500 into contributory account
  4. Call Schwab and ask to convert money into Roth IRA account
  5. After converted, buy longterm holds for stocks, bonds, etfs, etc. etc.
  6. Profit

Is that it? Can I contribute still for 2016 before 4/18? If I can and have done my taxes already, will they need to be amended? Technically, can I add $5500 now (for 2016) and then $5,500 after the 18th for 2017? Rinse, repeat for the wife as well? 

TIA

That's what I've done every year since exceeding the income restriction..   yeah it's that easy.

11k every year.    It's a stupid hassle, but that's all you have to do.

I don't know why they make us do that...  but that one bit of annoyance probably keeps most people from doing it...  most of my dentist friends don't bother..  they say "eh, too much work,  too little benefit.. it's only 11K"               Well that #### adds up over time

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38 minutes ago, Dentist said:

That's what I've done every year since exceeding the income restriction..   yeah it's that easy.

11k every year.    It's a stupid hassle, but that's all you have to do.

I don't know why they make us do that...  but that one bit of annoyance probably keeps most people from doing it...  most of my dentist friends don't bother..  they say "eh, too much work,  too little benefit.. it's only 11K"               Well that #### adds up over time

Your other dentist friends are too busy buying cool cars, banging young chicks, and killing exotic animals.

You know, enjoying life.

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39 minutes ago, Dentist said:

That's what I've done every year since exceeding the income restriction..   yeah it's that easy.

11k every year.    It's a stupid hassle, but that's all you have to do.

I don't know why they make us do that...  but that one bit of annoyance probably keeps most people from doing it...  most of my dentist friends don't bother..  they say "eh, too much work,  too little benefit.. it's only 11K"               Well that #### adds up over time

If I start now at 33, $11k a year at 7%, 30 years is an extra $1MM in retirement. 

@RUSF18 can anyone else speak to the comment above about no tax ramifications if I maxed my 401k and don't take any positions with the money in the account?

 

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1 hour ago, James Daulton said:

Your other dentist friends are too busy buying cool cars, banging young chicks, and killing exotic animals.

You know, enjoying life.

what basspoles,  life isn't meant to be enjoyed, it's meant to be suffered through.  Live, accumulate, die... put my net worth on my headstone like a final score.

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1 hour ago, fantasycurse42 said:

If I start now at 33, $11k a year at 7%, 30 years is an extra $1MM in retirement. 

@RUSF18 can anyone else speak to the comment above about no tax ramifications if I maxed my 401k and don't take any positions with the money in the account?

 

yeah, I think 7% is super aggressive, but even 5% over 32 years for you (assuming 65 is your retirement time)  is still a mill.

I think it's noteworthy money and I do it..

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19 minutes ago, Dentist said:

what basspoles,  life isn't meant to be enjoyed, it's meant to be suffered through.  Live, accumulate, die... put my net worth on my headstone like a final score.

At least your kids will be able to enjoy themselves.  Oh and your wife's second husband!

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27 minutes ago, Dentist said:

what basspoles,  life isn't meant to be enjoyed, it's meant to be suffered through.  Live, accumulate, die... put my net worth on my headstone like a final score.

Serious question, how many dumps have you taken on patients when they were passed out on laughing gas?

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Just now, Don't Noonan said:

Serious question, how many dumps have you taken on patients when they were passed out on laughing gas?

You with the dental board?    Those people knew what they were getting into!   What did they expect when they went to my website clevelandsteamerdentist.com?  

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7 hours ago, fantasycurse42 said:

If I start now at 33, $11k a year at 7%, 30 years is an extra $1MM in retirement. 

@RUSF18 can anyone else speak to the comment above about no tax ramifications if I maxed my 401k and don't take any positions with the money in the account?

 

Whether you take a position or not, its the conversion that you need to report and you do it for the year that it happened so 2017 if you're doing it now.   Fill out form 8606.  This is the minor pita part of a backdoor roth.   

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  • 1 month later...

Doesn't apply to most folks, but if you plan on sending your kids to private school for k-12, you should look at the Coverdell Education Savings Account instead of a 529. 

Downside is that it's capped at $2k/year/kid but no tax on the earnings if you use it for educational expenses including k-13 and college. 

Disappointed I didn't know about these til just now. 

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Went to a NAPFA certified fee only CFP.  He's doing all of the back door Roth's I didn't have before.  Have multiple accounts opened up for me and Mrs. Smails. Taxable, non taxable, one for the trust. Must be 5 or 6 accounts through TD Ameritrade.  Almost all Dimensional Fund Advisors with some Vanguard Admiral stuff mixed in.  At least I have a plan now..

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On 4/7/2017 at 0:52 PM, Dentist said:

That's what I've done every year since exceeding the income restriction..   yeah it's that easy.

11k every year.    It's a stupid hassle, but that's all you have to do.

I don't know why they make us do that...  but that one bit of annoyance probably keeps most people from doing it...  most of my dentist friends don't bother..  they say "eh, too much work,  too little benefit.. it's only 11K"               Well that #### adds up over time

Where do you get the $11k/year if the max contribution per year is $5500?

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Trump's budget plan goes after Federal workers. 

I'm not sure why there is so much anger over the increase of employee match. At least the way I'm understanding it. This would force people to increase their contribution to 6% in order to get the match. Thus ensuring that employees are saving 12% (which is the minimum people should be saving anyway).

I kind of understand the removal of the FERS supplemental annuity. This basically allows a worker to retire early at their minimum retirement age as long as they have worked a certain number of years (usually 30 years). It pays the same amount the person would receive at 62. Who else gets a benefit like this? My wife was going to take advantage of this had she not been forced into disability retirement.

The one thing I don't understand is the removal of the COLA raise for FERS retirees. At least not to have it start in 2018. Way to guarantee a loss of income year over year.

This is if the budget gets approved.

Thanks Trump.  

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  • 4 weeks later...

I'm rethinking my retirement plans. I was laid off 5 weeks ago and while the first two weeks were ok (spent a week in California and a week in Vegas), these last few weeks have been rather boring. I've done a few projects around the house, but without having a real purpose each day, I feel kind of lost. I don't think I could do this for 30 years. 

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9 minutes ago, KCitons said:

I'm rethinking my retirement plans. I was laid off 5 weeks ago and while the first two weeks were ok (spent a week in California and a week in Vegas), these last few weeks have been rather boring. I've done a few projects around the house, but without having a real purpose each day, I feel kind of lost. I don't think I could do this for 30 years. 

GB those who need to work for a purpose.  I work to live, I don't live to work.  If I could retire tomorrow (44), I would in a second and not look back.

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11 minutes ago, KCitons said:

I'm rethinking my retirement plans. I was laid off 5 weeks ago and while the first two weeks were ok (spent a week in California and a week in Vegas), these last few weeks have been rather boring. I've done a few projects around the house, but without having a real purpose each day, I feel kind of lost. I don't think I could do this for 30 years. 

Any hobbies that you could turn into a passion?

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11 minutes ago, bigbottom said:

Any hobbies that you could turn into a passion?

I think this is where I'm kind of lost. My hobbies have been paired down over the last decade or so. Most of my energy was spent on the kids. Now that they are doing their own thing, I guess I'm going to have to find some new things. 

I spent last week repainting a sign for my brothers bar. (he recently divorced and it had his and his ex's name on it)  I've thought about refurbishing furniture, but I'm not sure I would have the same passion if it wasn't for someone I knew. 

I thought this was going to be easy.

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On ‎5‎/‎21‎/‎2017 at 10:13 PM, KCitons said:

Trump's budget plan goes after Federal workers. 

I'm not sure why there is so much anger over the increase of employee match. At least the way I'm understanding it. This would force people to increase their contribution to 6% in order to get the match. Thus ensuring that employees are saving 12% (which is the minimum people should be saving anyway).

I kind of understand the removal of the FERS supplemental annuity. This basically allows a worker to retire early at their minimum retirement age as long as they have worked a certain number of years (usually 30 years). It pays the same amount the person would receive at 62. Who else gets a benefit like this? My wife was going to take advantage of this had she not been forced into disability retirement.

The one thing I don't understand is the removal of the COLA raise for FERS retirees. At least not to have it start in 2018. Way to guarantee a loss of income year over year.

This is if the budget gets approved.

Thanks Trump.  

 

A distinction needs to be made between past benefits earned, and future benefits.

First, I think you are confusing two things when you discuss employee match above.  There is a 401k component, called the TSP, which the employer matches 5% on.  Nobody has talked about changing that in the budget that I am aware of.  And yes, you are correct that people "should be saving 12%" as a minimum.  Personally, I contribute $18,000 (the max) and my employer contributed a 5% match.

There is *also* a modest pension under FERS where, to summarize, the current deal is you get paid 1% of your final salary for each year you have worked.  It is slightly more complicated than that (google "high-3") but you get the idea.  Average $100k your final 3 years, and work 30 years, and you get 30% of $100k, or $30k per year pension.  Inflation indexing begins at age 62.  If you leave at say age 55 you have to sweat out 7 years of inflation before your pension starts.  $30k at age 55 would have the buying power of, say, $25k at age 62.  It is up to the employee to figure all that out when deciding when to retire.

Now, a lot of people have already worked for 10, or 20, or 30 years under this system.  It started in the mid-80's for new hires.  I have worked 17 years.  During each biweekly paycheck, an amount totaling about 13% of your biweekly salary is contributed to this plan.  It so happens that the employee puts up 0.8% and the employer puts up about 12%.  Doesn't matter the mx - the pension was being funded and those were the terms of compensation the employee was working under.  When I add up all my paystubs over those 17 years, $250,000 has been paid into the pension.  I paid in less than 1/10th of that.  Again, that was the compensation agreement I was working under.  They could have paid me more and not provided a pension.  The philosophy in the 80's was that retirement would be a 3-legged stool:  (1) Social Security (2) FERS pension and (3) TSP 401k.

If they want to change what happens to future contributions (no inflation indexing, or high-5 instead of high-3, for instance) they can do that.  If they want to require me to contribute more (say 6%) while the employer contributes less (say 6%), they can do that too.  They can freeze the pension and add the money to my paycheck.  But for the money already contributed I expect the deal to be honored.  Either that or cut me a check for the $250k (plus interest would be nice) and I'll throw it into the Wellington fund and fund my own pension.

I'm not even sure how much thought they have given to whether they can do anything to past contributions.  The legality seems shaky to non-existent.  I expect that gave as much attention to the real issues as they did to the green card holders when throwing that travel ban out there.  Zilch.

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6 minutes ago, proteus126 said:

 

A distinction needs to be made between past benefits earned, and future benefits.

First, I think you are confusing two things when you discuss employee match above.  There is a 401k component, called the TSP, which the employer matches 5% on.  Nobody has talked about changing that in the budget that I am aware of.  And yes, you are correct that people "should be saving 12%" as a minimum.  Personally, I contribute $18,000 (the max) and my employer contributed a 5% match.

There is *also* a modest pension under FERS where, to summarize, the current deal is you get paid 1% of your final salary for each year you have worked.  It is slightly more complicated than that (google "high-3") but you get the idea.  Average $100k your final 3 years, and work 30 years, and you get 30% of $100k, or $30k per year pension.  Inflation indexing begins at age 62.  If you leave at say age 55 you have to sweat out 7 years of inflation before your pension starts.  $30k at age 55 would have the buying power of, say, $25k at age 62.  It is up to the employee to figure all that out when deciding when to retire.

Now, a lot of people have already worked for 10, or 20, or 30 years under this system.  It started in the mid-80's for new hires.  I have worked 17 years.  During each biweekly paycheck, an amount totaling about 13% of your biweekly salary is contributed to this plan.  It so happens that the employee puts up 0.8% and the employer puts up about 12%.  Doesn't matter the mx - the pension was being funded and those were the terms of compensation the employee was working under.  When I add up all my paystubs over those 17 years, $250,000 has been paid into the pension.  I paid in less than 1/10th of that.  Again, that was the compensation agreement I was working under.  They could have paid me more and not provided a pension.  The philosophy in the 80's was that retirement would be a 3-legged stool:  (1) Social Security (2) FERS pension and (3) TSP 401k.

If they want to change what happens to future contributions (no inflation indexing, or high-5 instead of high-3, for instance) they can do that.  If they want to require me to contribute more (say 6%) while the employer contributes less (say 6%), they can do that too.  They can freeze the pension and add the money to my paycheck.  But for the money already contributed I expect the deal to be honored.  Either that or cut me a check for the $250k (plus interest would be nice) and I'll throw it into the Wellington fund and fund my own pension.

I'm not even sure how much thought they have given to whether they can do anything to past contributions.  The legality seems shaky to non-existent.  I expect that gave as much attention to the real issues as they did to the green card holders when throwing that travel ban out there.  Zilch.

There is also a FERS Supplemental Retirement Plan available to Federal Employees if they have worked 30 years and have reached the minimum retirement age. For my wife, that would have been at 56yrs - 3mths. With this plan she would have received the amount equal to her Social Security benefit at age 62 for those 6 years. They would then automatically convert her to Social Security.  It doesn't matter now that she was forced on Disability Retirement. It would have been nice to have this option. But, I understand why it should be removed. It's essentially makes it possible to collect SS in your mid 50's. Not something available to many people.

As I read it (on multiple sites), Trumps proposed budget hits current retirees with the reduction of COLA. For someone that is 5-10 years from retirement, it will force a recalculation and probably add a couple of years to there work life in order to offset. 

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On 5/21/2017 at 9:13 PM, KCitons said:

Trump's budget plan goes after Federal workers. 

I'm not sure why there is so much anger over the increase of employee match. At least the way I'm understanding it. This would force people to increase their contribution to 6% in order to get the match. Thus ensuring that employees are saving 12% (which is the minimum people should be saving anyway).

I kind of understand the removal of the FERS supplemental annuity. This basically allows a worker to retire early at their minimum retirement age as long as they have worked a certain number of years (usually 30 years). It pays the same amount the person would receive at 62. Who else gets a benefit like this? My wife was going to take advantage of this had she not been forced into disability retirement.

The one thing I don't understand is the removal of the COLA raise for FERS retirees. At least not to have it start in 2018. Way to guarantee a loss of income year over year.

This is if the budget gets approved.

Thanks Trump.  

Nobody. but they're all welcome to apply for a position. Federal salaries are solid but many can get paid more in the private sector. More risk in the private arena sure.

1 hour ago, KCitons said:

I'm rethinking my retirement plans. I was laid off 5 weeks ago and while the first two weeks were ok (spent a week in California and a week in Vegas), these last few weeks have been rather boring. I've done a few projects around the house, but without having a real purpose each day, I feel kind of lost. I don't think I could do this for 30 years. 

I kind of feel the same way but this "retirement" has included waiting for the next offer to come through.  While that's pending the wife doesn't want to spend money and I don't really want to either, right now.  That will change big time in the next retirement when our kids are grown and we have good pensions and savings. 

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2 hours ago, KCitons said:

I'm rethinking my retirement plans. I was laid off 5 weeks ago and while the first two weeks were ok (spent a week in California and a week in Vegas), these last few weeks have been rather boring. I've done a few projects around the house, but without having a real purpose each day, I feel kind of lost. I don't think I could do this for 30 years. 

Any non-profits you support? Or a cause that you are passionate about. Every cause has a non-profit out there and pretty much every non-profit welcomes volunteers.

What did you do for work? Or what skills do you have? Perhaps you can get a part time job (something flexible so you can enjoy 'retirement') or start a small side business. My FIL was a workaholic Doctor. I saw him three days after retiring and asked him how it was going "Horrible" he said, "Nothing to do". He ended up going back part time- though apparently his hospital is on the way to closing but I think the part time gig helped him ease into a slower lifestyle. He might be able to do the full retirement thing now. 

Maybe think of your family as a non-profit. What can you do for them? Now- it doesn't have to be things for them directly but maybe write down your biography or research the family tree or plan a family reunion or a big family trip.

What it comes down to is 'what do you enjoy' and then figure out how you can spend your time around that.  

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8 minutes ago, Chadstroma said:

Any non-profits you support? Or a cause that you are passionate about. Every cause has a non-profit out there and pretty much every non-profit welcomes volunteers.

What did you do for work? Or what skills do you have? Perhaps you can get a part time job (something flexible so you can enjoy 'retirement') or start a small side business. My FIL was a workaholic Doctor. I saw him three days after retiring and asked him how it was going "Horrible" he said, "Nothing to do". He ended up going back part time- though apparently his hospital is on the way to closing but I think the part time gig helped him ease into a slower lifestyle. He might be able to do the full retirement thing now. 

Maybe think of your family as a non-profit. What can you do for them? Now- it doesn't have to be things for them directly but maybe write down your biography or research the family tree or plan a family reunion or a big family trip.

What it comes down to is 'what do you enjoy' and then figure out how you can spend your time around that.  

Thanks for the suggestions. I have thought about helping out a non profit. 

I worked in retail fraud. Part of the problem is that I'm not finding a lot of job opportunities locally that fit my experience. I've been applying for fraud positions at banks and insurance companies. I'm the kind of guy that thrives on results. Without opportunities, it's hard to produce results. The more bored I get, I'm afraid I'm going to settle for anything just to get out of the house. 

That coupled with my kids doing their own thing, my wife working 40 hours a week, it's pretty quiet on the home front. 

My brother mentioned needing a corn hole game for his 4th of July party. So, I will probably run to Home Depot and see about building one of those. 

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5 hours ago, KCitons said:

As I read it (on multiple sites), Trumps proposed budget hits current retirees with the reduction of COLA. For someone that is 5-10 years from retirement, it will force a recalculation and probably add a couple of years to there work life in order to offset. 

I'd quit, after properly preparing a landing pad.  I'm not putting up with that kind of haircut.  Many of the good ones would leave, and virtually all the good ones under 35.  Ghost town.  I'm only talking about research engineering.  Absolute wreckage.  I doubt GSA, HUD, or the Patent Office lose a soul.  But we all hang together, eh? :)

That said, I doubt much happens to already-earned benefits.  High-5 vs. High-3 or the SRS might happen I suppose.  Doubt it, but Ryan is a major enemy to feds, and Trump would love to "get a win".  The terms of employment for new hires?  Yeah, that is all at risk.  Low hanging fruit right there.  Interesting times for Feds.  When isn't it?

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My main hope is that it's just a proposal and will have trouble getting passed as is. But yeah, Fed workforce has been in the crosshairs with each new budget. Good luck to you and all other Federal employees. We need quality people at all levels.

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On 5/19/2017 at 3:54 PM, Tiger Fan said:

Doesn't apply to most folks, but if you plan on sending your kids to private school for k-12, you should look at the Coverdell Education Savings Account instead of a 529. 

Downside is that it's capped at $2k/year/kid but no tax on the earnings if you use it for educational expenses including k-13 and college. 

Disappointed I didn't know about these til just now. 

Just found out about this myself last month, after we decided to send my daughter to private high school next year.  I just assumed I could tap into 529 money if I needed to - nope.  Pretty bummed I hadn't been doing the Coverdell instead (or as well).

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9 hours ago, KCitons said:

My main hope is that it's just a proposal and will have trouble getting passed as is. But yeah, Fed workforce has been in the crosshairs with each new budget. Good luck to you and all other Federal employees. We need quality people at all levels.

Thank you.

I will say that based on my observations, we really could do things better.  The administrative side is fairly bloated.  A lot of that is due to procurement rules I believe.  EEO is also taken pretty seriously.  The procurement rules make it quite difficult and cumbersome to get the material we need.  Not impossible, but there is an intent (I believe) to discourage spending by making it hard.  Especially for IT.  The price we pay for being in the public eye and having lots of bad behavior through the years to live down.  You guys wouldn't believe the amount of regulation we deal with, and the amount of mandatory training we get each year.

Regarding training, I have stacks for each year, for the past 5 years, tacked to my wall for the grim amusement of myself and my co-workers.  Each stack is 15-20 pages thick, with each page a training certificate.  That is just for online training, where each course takes anywhere from 5 minutes to 2 hours.  On the cover of each stack is the cost to the government (the taxpayer) for each pile.  It is running $3k / year or so.  Pretty wasteful.  There is also a good bit of in-person training, perhaps 8 hours each year.  It adds up, and distracts from the real work.

I also have a "wall of compliance" where I have tacked up all the sheets we are required to display in each cube.  10 sheets up there, including 4 on operational security, one on the PII triangle, one on IT basics, a cue card, and SOP for performing a certain kind of work in the space, a bomb threat checklist, etc.  Each computer is festooned with stickers showing classification level, dire warnings not to plug your phone into it, and tracking barcodes.  Yes, there is a bit of the movie Brazil going on.  Tolerable but annoying when you think about it.

Once you get past all that, it is a good workplace.  We innovate, and our personnel are certainly on par with those found at the big defense firms.  We tend to hold more technical expertise, are heavier on the physicist and PHD side (thought I'm a BSEE only), and our institutional memory is quite long due to the stability found here.  We do have a few poor employees, but they give it a shot.  15 years ago we began hiring only after a 1-2 year tryout as on-site contractors.  This has been a very good system, and all our government hires under 40 years of age are good to excellent.  A few older folks who we won't miss when they retire but overall a very healthy group.  We have a good division head who has been in place for those 15 years.  Other divisions (~100 employees typically) may be quite different.

The millenials are really struggling right now with the bureaucracy and the negative tone.  We lose quite a few after a few years.  Some go to other agencies.  A few have gone to the big contractors or Hopkins.  We had one go to SpaceEx - he was a stud who I trained and hated to lose.

Sorry for side-tracking the retirement discussion, fellas.

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I have a 401k and Roth IRA's for my wife and I.  What percentage of the total balance would you want in each type of account at retirement?  Based on current funding I would end up with 70% 401k and 30% Roth.  We are currently in the 25% tax bracket and have around 23 years to retirement.

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I'd tax-shelter (401k) now as much as possible, and then worry about funding the Roth.

That said, you do want a significant chunk in the Roth to allow you to manage your tax picture in the years after you are done working.  You 70%/30% projection sounds good.  If you end up with less in the Roth than you like down the road, you can recharacterize some 401k funds into Roth funds.  Do that when your income is low (post-retirement) to minimize taxes on the transferred funds.  You have plenty of time to figure out the fine details.

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On 5/19/2017 at 6:54 PM, Tiger Fan said:

Doesn't apply to most folks, but if you plan on sending your kids to private school for k-12, you should look at the Coverdell Education Savings Account instead of a 529. 

Downside is that it's capped at $2k/year/kid but no tax on the earnings if you use it for educational expenses including k-13 and college. 

Disappointed I didn't know about these til just now. 

Wow didn't know about this, I have 7/5/2 and all are(or will be in the case of the 2 year old) private schooled.  I'll be digging into this.  I have 529s setup but there's minimal money in them at this point.

Edited by lumpy19
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3 minutes ago, lumpy19 said:

Wow didn't know about this, I have 7/5/2 and all are(or will be in the case of the 2 year old) private schooled.  I'll be digging into this.  I have 529s setup but there's minimal money in them at this point.

Yes and I also just learned that if you're over the income thresholds that you can gift your kids the money and they can open them up. It could have some impact on financial aid if you still have funds left in them when they go to college, it I plan on using them all up by then. 

Still need to do a tad more research though before I pull the trigger. Will keep y'all posted. 

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45 minutes ago, Tiger Fan said:

Yes and I also just learned that if you're over the income thresholds that you can gift your kids the money and they can open them up. It could have some impact on financial aid if you still have funds left in them when they go to college, it I plan on using them all up by then. 

Still need to do a tad more research though before I pull the trigger. Will keep y'all posted. 

Eating up 2k/year per kid should be no problem, k-8 costs me about $5500/year total for all 3 but 9-12 will be significantly more expensive so anything left over will get chewed up pretty quick.

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Took some time yesterday to write our long term cash flow statement / budget.  It's rather eye opening to consider when you'll buy a new car, pay off your mortgage, buy a cabin, pay for college, and retire (among other things).  

Ours goes 12 years in the future for income and expenses, 30 years for retirement accounts.  Next step will be to figure how much, if any, we want in retirement accounts other than Roth.  With social security our income at retirement will be pretty close to my current income, not counting withdrawals. With 5 kids we barely pay taxes now so I'm inclined to go all Roth  (including tsp). Is that the smart choice?

https://www.hmpayson.com/personal-finance-301-budgeting-financial-statements/

Personal Finance 301 – Budgeting & Financial Statements

As advisors, we place a high level of importance on financial planning which encompasses many aspects of life, including budgeting, retirement planning, education planning, risk management and estate planning. In December 2014, we published a paper titled “Financial Foundations for the Next Generation” as the first note in the series. The second part of that series focuses on planning for 30 – 40 year old individuals who are in the early to mid-stages of their careers. Given the increasing complexity of planning for this age group, we are breaking down the series into parts with this section focusing on understanding personal financial statements and budgeting. The next note will focus on savings & investing, and the final one on risk management & estate planning.

Creating a Plan

Where do you see yourself in 20 years? As you head into your 30s and 40s, life becomes complicated. When you are establishing your career, starting a family, managing various debts, or buying a home, it becomes important to find time to enjoy life. Planning for future aspirations is essential, but simplicity is key.

First, prioritizing goals is a practical starting point to force us to rank what is most important. What goals are you willing to compromise, if necessary, to achieve higher goals? There is no one correct order of desires. While one individual may want to own a home as soon as practical, another may want to start a family and ensure education is well funded. By understanding the economics of choices you make, you can ensure your decisions are consistent with your rank order of goals. For example, if you are planning to buy a house in the near future, but then instead buy an expensive car that consumes large amounts of disposable income, you are showing a clear inconsistency between goals and actions.

Before creating a plan, one must know where they are starting. To determine the strengths and weaknesses of your financial position, create your personal financial statements (a balance sheet and a cash flow statement).

Understanding Assets & Liabilities – The Balance Sheet

A balance sheet identifies your assets (what you own) and liabilities (what you owe).  Asset types include cash and cash equivalents, investment portfolios, retirement accounts, real estate, and business interests. Assets are listed from most liquid (easiest to convert to cash) to least liquid whereas liabilities are listed from those requiring earliest repayment to those due later.

Each asset category has a distinct combination of characteristics including purpose, liquidity, tax profile, cash flow, and time horizon. Understanding these characteristics allows one to better evaluate the risk and return possibilities for the assets, both individually and in total. For example, a checking account (i.e. cash) is used to pay current bills or cover unexpected expenses, costs very little to maintain, and is quite liquid, but offers no growth nor much income. Conversely, real estate creates the prospect for long-term growth but often requires taking on debt, can be costly to maintain (property taxes, maintenance, etc.), and is illiquid.

Liabilities, or debts, are broken into two primary categories: current (due in 12 months or less) and long-term. Credit card debt is an example of a current liability while mortgages, student loans, and car loans are examples of long-term liabilities. Accumulating debt for the purpose of maintaining a lifestyle or acquiring status symbols can lead to financial stress. Debt used to finance productive, long-term endeavors (real estate, education) can be instrumental in building long-term wealth. 

After building the balance sheet, determine the strengths and weaknesses of your financial position by asking:

 1. How many days or months of expenses do you have in cash?

  a. A reasonable target is 3 to 6 months

 2. How many of your assets are cash-producing (savings, investments) and cash-consuming (personal real estate)?

  a. What is the proportion between the two?

  b. Can your cash-consuming assets be reasonably maintained by your cash flow?

  c. Over time, you should seek to have more cash-producing assets than cash-consuming assets.

 3. How many of your assets are illiquid and are they the majority?

  a. What is the probability of needing to sell these assets quickly for a fair price and are you able to assume this risk?

 4. How much total debt do you have?

  a. Is most of it productive debt or debt accumulated to finance consumption?

  b. Is the overall debt level increasing or decreasing?

  c. What is the cost of financing different debts?

Next, consider your desired financial position in the years ahead and how you will need to manage your balance sheet to get there (e.g. build up liquidity reserve, increase retirement savings, pay down consumer debt more quickly, etc.).

Net worth is simply your assets minus your liabilities. Growing your net worth not only requires diligent saving and investing to build assets over the long term, but also requires managing and paying down debt effectively.

Cash Flow Statement – The Ins and Outs

Developing a cash flow statement (and budget) is essential to creating a financial plan and will allow for a better understanding of the sources and uses of your cash. Proper cash flow management is critical to save effectively, manage debt obligations, and ultimately increase your net worth. 

For most adults beginning their careers, earned income is the primary source of cash inflow. However, many may generate cash from other sources such as trust income, rental property, family gifts, etc.  Living below your means is key to getting ahead financially over time. To get to this point, an analysis of the uses of cash is paramount. 

A cash flow statement breaks down cash uses into three categories:

 1. Fixed, non-discretionary expenses

 2. Variable, non-discretionary expenses

 3. Discretionary expenditures (fun money)

Savings is obviously a voluntary expenditure, but, with good financial habits, it becomes compulsory and is budgeted accordingly.

 

Once created, some analysis of the cash flow statement is in order.  Questions to ask to gain a better understanding include:

 1. Is there a surplus? If so, how much, both in dollars and as a percentage of cash inflow?

 2. How much of the total is spent on fixed expenses?

  a. Preferably 50% or less

  b. Housing related expenses should be 30% or less

 3. How much is spent on maintaining current lifestyle or fun money?

  a. 30% or less is preferable

 4. How much is allocated to savings?

  a. Try to save 10% or more of income just for retirement

If too much is consumed and not enough saved, developing a budget becomes a necessary exercise. As you think about budgeting, where in your cash flow statement are you willing to make adjustments to ensure spending lines up with your goals and priorities? If building your net worth is a high priority, then dedicating cash flow to debt payments and savings must also be a priority. 

Integrating the Two

Now, having reviewed each individually, you can examine how the balance sheet and cash flow statement need to work together. Some items to consider include:

 1. How much cash is being used to support your assets (e.g. mortgage payment, property taxes, utilities)? Does this prevent building an emergency reserve or delay saving for retirement?

 2. Where is surplus cash going? Is it adding to savings, paying down debt, or building retirement accounts?

 3. Are the discretionary expenses so high that debt (credit card or home equity line of credit) is increasing in order to finance lifestyle?

 4. Are family gifts received invested or spent?

 5. Is portfolio income reinvested to build up the portfolio or used to pay bills?

Budgeting – Where to begin?

Budgeting is a means to develop strong saving and spending habits. Poor spending habits are the single greatest financial risk people face.

Begin by dividing your cash flows into three categories: essentials (aim for 50% or less), financial priorities (20%), and lifestyle (30%). Essentials include your basic needs like food and housing. Financial priorities include additional payments towards debt or saving for college and retirement while lifestyle includes all of your discretionary spending like entertainment and travel. Using this simple 50/20/30 approach will keep your spending on track. (Click here to see a budget worksheet).

Here are some simple guidelines to follow:

 1. Pay at least the minimum amount due on credit cards every month.

 2. Build an emergency reserve. Try to save at least $2,000 and continue building until reserves equal 3-6 months of expenses.

 3. Contribute to an employer sponsored retirement plan at least up to the employer match (typically between 3% and 5% of salary). Implement an annual increase until you have reached 15% or the maximum allowable ($18,000 for 2017).

 4. Start paying down debt more aggressively. Focus on the smallest debt first to pay it off quickly. Once paid, take advantage of your progress, and move that extra cash flow to chip away at the highest cost debt (usually credit cards).

 5. If you have children, establish an education savings account as soon as possible and make regular contributions, even if modest. A 529 Plan, an UTMA, or a taxable account are all potential options, each having different tax and flexibility profiles.

 6. Establish a non-retirement investment account at a reputable mutual fund company or advisory firm.

Conclusion

Financial planning is a marathon, not a sprint. If your finances are unsatisfactory today, do not panic. Start by tackling any pressing financial situations, such as late debt payments, then focus on your top priorities.  Remember, time is a valuable asset for young adults, but it will lose its value if not used to your advantage. Take the first step by making beneficial decisions for your financial future.

 

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On ‎6‎/‎21‎/‎2017 at 8:28 AM, Tiger Fan said:

Yes and I also just learned that if you're over the income thresholds that you can gift your kids the money and they can open them up. It could have some impact on financial aid if you still have funds left in them when they go to college, it I plan on using them all up by then. 

Still need to do a tad more research though before I pull the trigger. Will keep y'all posted. 

Thanks for posting about this.  Never heard of this account before and will likely need to send our kids to private HS (or move to a better school district).

RE: impact on financial aid:

Can the Coverdell ESA Impact Your Federal Financial Aid Eligibility?

Coverdell ESA’s may affect financial aid significantly, or not at all.

It depends on who the “owner” of the account is. By definition, the "owner" is typically the person who sets up the account and not the person who is eventually going to college (they are the “designated beneficiary”).

  • If the child is both the owner and the designated beneficiary and is still considered a dependent of the parents, none of the assets are counted against financial aid. 
  • If the child is both the owner and the designated beneficiary and is considered independent of the parents, 20% (this dropped from 35% in 2007) of the assets are counted against financial aid.
  • If the owner is a parent, then 5.64% of the assets are counted against financial aid.
  • If the owner is a grandparent, a member of the extended family, or an unrelated individual, it is argued that the assets do not count against financial aid at all. This is due to the fact that there is no place to report assets owned by people other than a parent or student on the FAFSA form.
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1 hour ago, SouthJersey said:

Thanks for posting about this.  Never heard of this account before and will likely need to send our kids to private HS (or move to a better school district).

RE: impact on financial aid:

Can the Coverdell ESA Impact Your Federal Financial Aid Eligibility?

Coverdell ESA’s may affect financial aid significantly, or not at all.

It depends on who the “owner” of the account is. By definition, the "owner" is typically the person who sets up the account and not the person who is eventually going to college (they are the “designated beneficiary”).

  • If the child is both the owner and the designated beneficiary and is still considered a dependent of the parents, none of the assets are counted against financial aid. 
  • If the child is both the owner and the designated beneficiary and is considered independent of the parents, 20% (this dropped from 35% in 2007) of the assets are counted against financial aid.
  • If the owner is a parent, then 5.64% of the assets are counted against financial aid.
  • If the owner is a grandparent, a member of the extended family, or an unrelated individual, it is argued that the assets do not count against financial aid at all. This is due to the fact that there is no place to report assets owned by people other than a parent or student on the FAFSA form.

Thanks.  Mustv'e missed that originally.  Helps alot :thumbup:

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We're officially old and nerdy. We enrolled our flower girl and her new husband into Financial Peace University.  They're young and just getting started, I figured this would be a good place for them to start together.  We haven't seen them in a while so if they hate us for it so be it but if it helps them, we'll be happy for them.  

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  • 3 weeks later...

Looking for some thoughts on my current 401k allocations.  I currently have my contributions allocated among the six funds listed below.  The Fidelity Freedom® Index 2045 Fund Investor Class is now available.  The expense ratio is .21%.  Would you stick with my current allocations or make the switch to the target fund?

 

Asset ClassSubclass                   Fund Name                        Symbol    Fee% Invested

Stock Investments  Large Cap    FID 500 INDEX PR               FUSVX   0.045    60%

Stock Investments  Mid-Cap       VANG MDCPVAL IDX ADM  VMVAX   0.07     5%

Stock Investments  Small Cap    VANG SMCP GR IDX ADM   VSGAX   0.07     5%

Stock Investments  International  HARBOR INTL RET           HNINX      0.72     10%

Stock Investments  International  INVS INTL GROWTH R6    IGFRX      0.9       10%

Bond Investments  Income         PIM TOTAL RT INST            PTTRX     0.47    10%

Edited by bcat01
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6 hours ago, bcat01 said:

Looking for some thoughts on my current 401k allocations.  I currently have my contributions allocated among the six funds listed below.  The Fidelity Freedom® Index 2045 Fund Investor Class is now available.  The expense ratio is .21%.  Would you stick with my current allocations or make the switch to the target fund?

 

Asset ClassSubclass                   Fund Name                        Symbol    Fee% Invested

Stock Investments  Large Cap    FID 500 INDEX PR               FUSVX   0.045    60%

Stock Investments  Mid-Cap       VANG MDCPVAL IDX ADM  VMVAX   0.07     5%

Stock Investments  Small Cap    VANG SMCP GR IDX ADM   VSGAX   0.07     5%

Stock Investments  International  HARBOR INTL RET           HNINX      0.72     10%

Stock Investments  International  INVS INTL GROWTH R6    IGFRX      0.9       10%

Bond Investments  Income         PIM TOTAL RT INST            PTTRX     0.47    10%

Age? What age do you plan on retiring? 

What does the invested portfolio look like? Same funds? Percentage of portfolio? 

Is this all of your retirement funds or do you have other sources? What are they? 

Do you have a limited group of options for your retirement funds? 

Not knowing those answer the initial thoughts I have.... the international and bond funds don't make me happy with their expense ratios. I'm pretty big on keeping cost down as much as possible. I am a huge fan of using feex.com- it is easy to use and does a great job of helping keep costs down giving alternatives to similar funds with lower cost. 

I'm not quite sure you need 20% put into two different international funds. I might drop the one with the higher cost and split the remainder into the Vanguard index funds. 

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8 minutes ago, Chadstroma said:

Not knowing those answer the initial thoughts I have.... the international and bond funds don't make me happy with their expense ratios. I'm pretty big on keeping cost down as much as possible. I am a huge fan of using feex.com- it is easy to use and does a great job of helping keep costs down giving alternatives to similar funds with lower cost. 

I'm not quite sure you need 20% put into two different international funds. I might drop the one with the higher cost and split the remainder into the Vanguard index funds. 

Haven't looked at the actual differences but I see Fidelity has an International index fund with a 0.19% expense ratio. Even without looking under the hood I'd be surprised if either of those chosen funds can make the 50-70 bps difference worth it. 

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Just ran across this article and wanted to comment on how screwed the younger generations are.  Baby boomers had easily one of the most benign run of market conditions to build wealth ever.  Huge tailwinds - and they're dramatically undersaved.  It drives me to the conclusion that the vast majority of people simply don't have the capacity to save for a future date and that there will be a big push for a nationalized retirement system in the not too distant future.  (A system that will be setup by financial companies to extract all the returns, not to mention the political imperatives that will distort it).

I read these things and just shake my head.  If that generation couldn't do it then no generation will ever save properly.  

Edited by Sand
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5 minutes ago, Sand said:

Just ran across this article and wanted to comment on how screwed the younger generations are.  Baby boomers had easily one of the most benign run of market conditions to build wealth.  Huge tailwinds - and they're dramatically undersaved.  It drives me to the conclusion that the vast majority of people simply don't have the capacity to save for a future date and that there will be a big push for a nationalized retirement system in the not too distant future.  (A system that will be setup by financial companies to extract all the returns, not to mention the political imperatives that will distort it).

I read these things and just shake my head.  If that generation couldn't do it then no generation will ever save properly.  

How is a nationalized retirement system different than SS?   The idea of retiring in the 60's isn't feasible for a lot of people and maybe it shouldn't be.  If you're living until you're 85, should you really have 20 years of retirement?   75 seems like the new 65 to me.  

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2 minutes ago, NutterButter said:

How is a nationalized retirement system different than SS?   The idea of retiring in the 60's isn't feasible for a lot of people and maybe it shouldn't be.  If you're living until you're 85, should you really have 20 years of retirement?   75 seems like the new 65 to me.  

It is not going to matter when people want to retire.  They simply will not be able.  There is not going to be a choice. 

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