In the coming week I will write a series of posts on the topic of 401K plans. Last week my company's 401K committee, of which I am a member, decided to migrate our 401K plan from ING to ADP. This decision followed a long period of research and internal discussions.
In the end, I am pretty confident that our new plan will be far superior to our existing one. Over the coming week, I will share the details of our new plan and some of the thinking that brought us to the decisions we are making. I will also discuss other interesting aspects of the 401K topic. Here is the posting schedule:
Monday - Our old ING 401K plan & why we chose ADP
Tuesday - Features of our much improved 401K plan
Wednesday - ROTH 401Ks
Thursday - 401K matching - the pitfalls
Friday - Why do we even need the 401K system?
Saturday, June 30, 2007
Friday, June 29, 2007
This is What's Wrong with the Tax Code
A couple of days ago CNN published a story about a speech given by Warren Buffet at a recent campaign event for presidential hopeful, Senator Hilary Clinton. Here is a quote from the CNN article:
"Buffett said he makes $46 million a year in income and is only taxed at a 17.7 percent rate on his federal income taxes. By contrast, those who work for him, and make considerably less, pay on average about 32.9 percent in taxes - with the highest rate being 39.7 percent."
What kind of tax system allows such ridiculous outcomes to exist? Although I disagree with their arguments, I understand why some people support a flat tax rate. However, is there any rational person that can justify a system under which the rich pay a LOWER tax rate than the poor?
Buffet did not stop there. He actually offered a reward of $1 million to anyone who could demonstrate that any one of the nation's wealthiest individuals pays a higher tax rate than that person's secretary...
As far as I am concerned, this is proof positive that the entire tax code must be scrapped and rebuilt from the ground up. This is not something that you can address with a quick fix. Our tax system is full of loop holes, and is fundamentally flawed. Unfortunately, the reason that our tax code is broken is that Congress has sold itself to special interests of all flavors. It is now lobbyists that control policy, not our so-called elected officials.
Is there no hope for tax justice for the middle class? Sadly, I don't think there is. It appears that paying a lower tax rate is yet another reason to try to become rich...
"Buffett said he makes $46 million a year in income and is only taxed at a 17.7 percent rate on his federal income taxes. By contrast, those who work for him, and make considerably less, pay on average about 32.9 percent in taxes - with the highest rate being 39.7 percent."
What kind of tax system allows such ridiculous outcomes to exist? Although I disagree with their arguments, I understand why some people support a flat tax rate. However, is there any rational person that can justify a system under which the rich pay a LOWER tax rate than the poor?
Buffet did not stop there. He actually offered a reward of $1 million to anyone who could demonstrate that any one of the nation's wealthiest individuals pays a higher tax rate than that person's secretary...
As far as I am concerned, this is proof positive that the entire tax code must be scrapped and rebuilt from the ground up. This is not something that you can address with a quick fix. Our tax system is full of loop holes, and is fundamentally flawed. Unfortunately, the reason that our tax code is broken is that Congress has sold itself to special interests of all flavors. It is now lobbyists that control policy, not our so-called elected officials.
Is there no hope for tax justice for the middle class? Sadly, I don't think there is. It appears that paying a lower tax rate is yet another reason to try to become rich...
Thursday, June 28, 2007
Life Style Inflation is a Good Thing
Many of us personal finance bloggers constantly warn against lifestyle inflation. Well, I am about to break rank with my colleagues. I am all for lifestyle inflation. Lifestyle inflation is a good thing.
For the uninitiated, let me take a step back and explain what the term lifestyle inflation means. Typically this term refers to the fact that people's spending habits increase to match their available income. For example, say you used to make $40K and got along great. Now you get a 25% raise and all of a sudden you are spending $50K without saving any more than you did previously.
So here is my take on the situation. The reason we strive to increase our income is so that we can improve our lifestyle, enjoy life, and get some of the luxuries that we desire. If you have more money to spend, why not do it? It means you are enjoying your hard earned income. What's the point of getting a raise if all it does is inflate the number at the bottom of your bank statement? Where is the fun in that?
I would like to introduce a new concept. Average long term lifestyle inflation. Lifestyle inflation is a good thing, so long as it is sustainable. The problem with lifestyle inflation as most personal finance bloggers refer to it, is that the increase in spending may not be sustainable. Sure, you got that raise and can afford to spend more now, but will you be able to maintain the same lifestyle in retirement? Would you be able to maintain the same lifestyle if you lost your job or had a medical emergency?
The problem is not that your lifestyle has inflated, but that your spending levels may not be sustainable in the long term. You may be setting yourself up for a fall if something goes wrong. However, if you are able to inflate your spending in a way that is sustainable throughout your life, that is the very definition of financial prosperity. This is exactly the objective of everyone who is interested in personal finance.
As a bottom line, here is the solution that I propose. If you find a way to sustainably increase your income, first ensure that you are financially able to weather any unexpected turbulence, such as job loss or disability. After you have addressed those critical needs, increase your spending. However, increase it in such a way that you will be able to sustain your new, higher level of spending even in retirement. If you follow this strategy, your lifestyle will continue to inflate sustainably throughout your life. Wouldn't it be great to know that things are likely to only get better? That's the power of financial planning.
For the uninitiated, let me take a step back and explain what the term lifestyle inflation means. Typically this term refers to the fact that people's spending habits increase to match their available income. For example, say you used to make $40K and got along great. Now you get a 25% raise and all of a sudden you are spending $50K without saving any more than you did previously.
So here is my take on the situation. The reason we strive to increase our income is so that we can improve our lifestyle, enjoy life, and get some of the luxuries that we desire. If you have more money to spend, why not do it? It means you are enjoying your hard earned income. What's the point of getting a raise if all it does is inflate the number at the bottom of your bank statement? Where is the fun in that?
I would like to introduce a new concept. Average long term lifestyle inflation. Lifestyle inflation is a good thing, so long as it is sustainable. The problem with lifestyle inflation as most personal finance bloggers refer to it, is that the increase in spending may not be sustainable. Sure, you got that raise and can afford to spend more now, but will you be able to maintain the same lifestyle in retirement? Would you be able to maintain the same lifestyle if you lost your job or had a medical emergency?
The problem is not that your lifestyle has inflated, but that your spending levels may not be sustainable in the long term. You may be setting yourself up for a fall if something goes wrong. However, if you are able to inflate your spending in a way that is sustainable throughout your life, that is the very definition of financial prosperity. This is exactly the objective of everyone who is interested in personal finance.
As a bottom line, here is the solution that I propose. If you find a way to sustainably increase your income, first ensure that you are financially able to weather any unexpected turbulence, such as job loss or disability. After you have addressed those critical needs, increase your spending. However, increase it in such a way that you will be able to sustain your new, higher level of spending even in retirement. If you follow this strategy, your lifestyle will continue to inflate sustainably throughout your life. Wouldn't it be great to know that things are likely to only get better? That's the power of financial planning.
Wednesday, June 27, 2007
Building Your Career Early Means More Cash in the Bank
A few days ago I read this post on Blueprint for Financial Prosperity, one of my favorite personal finance blogs. Jim makes the point that while he is young and unfettered, he is willing to trade more of his time for money, by working long hours and building his career. He expects that the balance will shift once he gets married and has kids. Once that happens his time will become more valuable to him.
Point well taken. It is interesting that Jim's argument works from a finance perspective as well, if you take into account the time value of money. A dollar that you earn today, is worth much more than a dollar you will earn in 20 years. For example, a dollar earned today, and invested in a money market account for 20 years at 5% per year, will be worth $2.52 before tax and inflation. That dollar you hope to earn two decades later is still just a dollar.
The point I am trying to make is that when you are younger and your family commitments are limited, not only do you have more time on your hands, but also the money you earn is worth much more over time. That is yet another incentive to aggressively invest in your career and financial security in your early years.
This argument is also closely related to the long term value of one's career. When you are just starting out, your career is a very valuable asset. It is a potential cash stream that you will tap over the following decades. That potential value of your career will gradually be converted into cold hard cash. Your career is like a big bank account - every time you get a pay check, you draw down the value of your career, converting potential income into actual income. As time passes and the potential value of your career gets drawn down, improvements and enhancements to your career are worth less and less. So, Jim's strategy works from that perspective as well. His early efforts to work hard and enhance his career, are worth much more to him than similar efforts he might be making in his later decades.
Point well taken. It is interesting that Jim's argument works from a finance perspective as well, if you take into account the time value of money. A dollar that you earn today, is worth much more than a dollar you will earn in 20 years. For example, a dollar earned today, and invested in a money market account for 20 years at 5% per year, will be worth $2.52 before tax and inflation. That dollar you hope to earn two decades later is still just a dollar.
The point I am trying to make is that when you are younger and your family commitments are limited, not only do you have more time on your hands, but also the money you earn is worth much more over time. That is yet another incentive to aggressively invest in your career and financial security in your early years.
This argument is also closely related to the long term value of one's career. When you are just starting out, your career is a very valuable asset. It is a potential cash stream that you will tap over the following decades. That potential value of your career will gradually be converted into cold hard cash. Your career is like a big bank account - every time you get a pay check, you draw down the value of your career, converting potential income into actual income. As time passes and the potential value of your career gets drawn down, improvements and enhancements to your career are worth less and less. So, Jim's strategy works from that perspective as well. His early efforts to work hard and enhance his career, are worth much more to him than similar efforts he might be making in his later decades.
Tuesday, June 26, 2007
Real Estate Market is Far From Recovery
The National Association of Realtors published their monthly state of the market assessment yesterday, under the title: "Existing Home Sales Ease Slightly in May". According to the report median home prices were down 2.1% year over year, to $223,700. The report says:
"Total housing inventory rose 5.0 percent at the end of May to 4.43 million existing homes available for sale, which represents an 8.9-month supply at the current sales pace, up from an 8.4-month supply in April."
According to a CNN report this inventory of unsold houses is at a 15 year high. However this did not stop the Association's President from saying to CNN:
"Buyers who've been on the sidelines may want to take a closer look at current conditions in their area... If they wait for sales to rise, their choices and negotiating position won't be as good as they are now."
You can always trust the realtors to come up with a positive spin even on the most negative real estate news ("it's not cramped, it's cozy"). Truth is that the real estate market is in a deep freeze. With the realtor's own report showing the inventory of unsold homes at historical highs and prices continuing to fall, I would say that the real estate market is years away from recovery.
A few months ago I heard a lecture given by the prestigious UCLA Anderson Forecast, regarding the state of the California Economy. According to the lecture, the real estate market is not typically susceptible to dramatic price decreases. Instead, in a down real estate market, the volume of houses sold decreases sharply while prices stagnate, sometimes for years, as inflation brings the real price of the home back in line with historical trends. If you believe this analysis, which I do, the real estate market will take several years to return to even modest growth.
"Total housing inventory rose 5.0 percent at the end of May to 4.43 million existing homes available for sale, which represents an 8.9-month supply at the current sales pace, up from an 8.4-month supply in April."
According to a CNN report this inventory of unsold houses is at a 15 year high. However this did not stop the Association's President from saying to CNN:
"Buyers who've been on the sidelines may want to take a closer look at current conditions in their area... If they wait for sales to rise, their choices and negotiating position won't be as good as they are now."
You can always trust the realtors to come up with a positive spin even on the most negative real estate news ("it's not cramped, it's cozy"). Truth is that the real estate market is in a deep freeze. With the realtor's own report showing the inventory of unsold homes at historical highs and prices continuing to fall, I would say that the real estate market is years away from recovery.
A few months ago I heard a lecture given by the prestigious UCLA Anderson Forecast, regarding the state of the California Economy. According to the lecture, the real estate market is not typically susceptible to dramatic price decreases. Instead, in a down real estate market, the volume of houses sold decreases sharply while prices stagnate, sometimes for years, as inflation brings the real price of the home back in line with historical trends. If you believe this analysis, which I do, the real estate market will take several years to return to even modest growth.
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