Color of Money Live (Sept. 4)

Sep 04, 2014

Washington Post nationally syndicated personal finance columnist Michelle Singletary answered questions in an online discussion.

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I'm super excited about the chat today. Joining me is Jonnelle Marte, who can answer your questions about the new retirement and wealth site at the Post "Get There." Have you seen it? What do you think? We'd love suggestions.

Jonnelle and I will also answer personal finance questions.

So let's get started.

Hi all! Michelle, thanks so much for having me. I'm excited for everyone to learn a little bit more about me and about Get There, our new home for all stories related to money and the impact it has on us. 

I'd like to see an article about paying off the mortgage early. I've recently read some experts say a 15 year mortgage is the smart financial decision. Too late, since we are already in a 30 year mortgage, but making little extra payments every month ($50 or so). Some say we should work to pay it off early, others say we should be putting that extra money into a mutual fund or to bulk up our retirement (which we already contribute to). Lots of conflicting advice!

Don't listent to the knuckleheads who tell you NOT to pay off your mortgage early. The best thing you can take into retirement is a paid off house with one caveat. You don't want to be house rich and cash poor, meaning you didn't save and invest for the money you need in retirement while you were also making extra payments on your mortgage. And with extra payments, even just one a year, you can knock years off your mortgage. That's what I'm doing. My husband and I have been making a lot of extra payments and we are making great progress toward getting rid of of that debt burden.

I think there's a little too much focus on college majors, honestly. I live in a state where one of the legislators tried to say that the state universities shouldn't offer several humanities type majors because they tend to be underemployed. But here's the thing: most philosophy majors don't go on to try to become philosphers. They do other things, like law school, or continuing in academia. I know people who were pre-med, but majored in American Studies or Sociology because they thought those majors would round out their educations. It's not so much what you major in, but what other skills you work to develop. Focusing on the major alone misses the point.

You are so right. My thing is major in whatever you like but make sure you have a plan for a JOB. And you do that my getting internships while you are in school. What bothers me are philosophy majors who have no idea what they want to do. Get an education but also get some skills.

Ms. Singletary, no question, but could not find another avenue to write. ;-) Simply want to say thanks for such a great article about costs and reclining issue.

Thank you so very much. I can't believe the amount of comments following my two columns on the recliner rage. It's insane!

What do you guys think?

The poster from last week who was concerned about whether he met some arbitrary goal for retirement savings fell into the trap that a lot of people do. There are two parts to the retirement equation -- income and expenses. If you don't know how much your expenses are going to be, you can't figure out what your income needs are. In my case -- and I am sure you can relate, Michelle -- my husband and I will have paid off our mortgage and finished paying for our kids' college by the time we are fully retired. Those reductions in expenses, not to mention no more payroll taxes or 401(k) savings, will make a big dent in what we need in retirement.

Hi, that is such a smart approach. Many advisers recommend that people prioritize their retirement planning around how much their expenses will be in retirement. The more you can reduce your costs, like housing and other necessities, the less you will need to draw down on your savings. Likewise, if you know your income in retirement will only be a certain percentage of what you were making before, it is smart to reduce your expenses to that level -- if you can! 

Ditto.

We have 3 teens. One in college, one 16 and the other 14. We are so out of here when the last one gets through high school and college. And how. Been saving like crazy people BUT we also don't plan on dragging a mortgage into retirement or any other debt. We will have saved and paid in CASH for all three college educations and plan on reducing other expenses.

I hate it when some financial experts make people feel that if they don't have millions in the bank they can NEVER retire. 

You can do it. May not be the retirement you planned but you can retire if you watch your expenses and align them with what you've saved. 

 

Why did the Post feel the need to start a new site for money?

Thanks for this question. Since you're in this chat, you know that The Post always had people like Michelle writing smart and important stories about money and personal finance overall. What was missing was a home on the Web site where we could harness all of those stories and couple them with tools and other graphics that we think may be helpful to people who are looking for answers on the best ways to use money to their advantage.  That's what we hope to offer with Get There.

Don't forget, you can refinance from a 30-year loan to one of shorter term (15 or 20 years). We did that about 6 years ago; although the monthly payments are higher I love seeing each month's statement that show our growing equity (and how much less we have to pay off).

That's right. Thanks for sharing.

But know you can also do the same by just making extra payments to principal without the cost of refinancing. Also, I caution people to not lock themselves into a shorter mortgage with a higher monthly payment if there's any concern about their income. The longer term mortgage gives you some financial freedom in what we know has become an unstable job market. 

I'm feeling so overloaded with information. How will Get There be different? What's the goal?

Don't we all! There is a lot of information out there and it can be hard to know what strategies are worth considering. But our goal here is not to overwhelm readers. We are hoping this will be the place people can turn to when they have a question about what they should do, similar to what goes on in this chat. 'How much should I put in my 401(k)? How should I talk to my children about money? What are the common mistakes that might jeopardize my retirement security?'  We want it to be useful, and actionable. And that's why I'm here, to hear more about the questions you want us to answer. 

The only time I recline the seat is on an overnight/overseas flight, after dinner, when the lights are turned off and everyone reclines and sleeps. Otherwise, I never recline. It seems the height of rudeness. The Knee Defender, on the other hand, seems unfortunate, but a reasonable solution when the airlines continue to sell the same space twice.

Thanks for sharing.

I see the point of the knee defender and had dreamed of buying one myself but after the recent incidents and the fact that the airlines ban it, will pass. Just have to be crunched.

My husband and I are closing on a house in three weeks and our plan is to pay our mortgage off early, thanks to the advice I got from you! Our plan is to review our savings once a year and anything extra beyond our emergency fund, 6 months savings, and planned renovation projects (after contributing to our 401Ks) is going towards the mortgage. Love your chats!

Good plan!

And thank you.

What percentage of an individuals income should be contributed to their retirement account.

How much people should save as a percentage of their income varies. For me there isn't one number. Your number is going to be different based on so much:

-- Do you have a traditional pension?

-- How much do you have saved now for retirement?

--  How much are you going to get in Social Security

-- Will you have debt? A mortgage?

-- Do you plan or want to travel a lot?

-- The cost of living where you want to retire?

-- Can you or will you want to continue working full-time? Will you work part-time?

-- What medical insurance will you have?

-- Got any trifling adult children, grandchildren you're feel pressured to help take care of?

See what I mean. You need your own number after you answer the questions.

Michelle is so right, there is no blanket answer here! But one good tip is to make sure you're not leaving money on the table. At the very least, contribute enough so that you are getting the full matching contribution from your employer, if it offers one. Then you want to think about how much more you can afford to put away after that. 

I have a friend who really doesn't need to draw her mandatory retirement money since she's still working, so she just takes the least amount and puts it right back into a savings account. I'm thinking of doing this as I will be 70 soon and still working. What do you think of the idea?

Love it. 

Go for it. 

 

I have saved $50,000 to use as a downpayment for a house. I have narrowed it down to two choices; a newer 3 level townhouse and an older rambler. Both are about the same distance from work and cost about the same. The rambler will need more work but it has the potential to be nicely redesigned for aging in place as I wish this be my home for the next 30 years. The townhouse has less immediate needs (plus little lawn care) but will never have a garage and will always have lots of stairs. Plus the rambler is near a bus stop that could take me to shopping or the hospital. How do I compare options financially? Emotionally I like both houses about the same. Thank you.

Such a great question and you are so right in your thinking.

Here's my 2 cents worth. I wish I had a home with less stairs. My husband and I took in his elderly father and having stairs made it much more difficult to take care of him. We had to turn the first floor office into a bedroom. We only had a half bath on the first floor. And his dad didn't want to be secluded on the floor with the bedrooms. Same with other older relatives who come and have difficulty managing stairs. Had I to do it over again, I would buy a rambler or at least a home with a full bath and bedroom on the first floor. 

If you plan to age in place, the rambler may be the best in the long run. But again that's based on my experience. 

I think the important thing is that students, in whatever major, learn actual skills that make them desirable to employers. In my job I do a lot of data collection and statistical analysis, skills I learned while I was majoring in Political Science. I've interviewed applicants with social science majors and their skills vary, some of them don't have even basic research or writing experience. You can graduate with a degree, but that doesn't mean you've got employable skills.

I agree with this. In addition to studying hard, it's important for students to be thinking about what job they want to get out of the experience. That means getting internship experience whenever possible and networking with people who have the type of job you think you want. That is the only way to figure out if you really like that job and to learn more about what it will really take to be employed in that industry.  Some companies will emphasize experience while others may like to see particular degrees and credentials. 

Two thumbs up on the new money and personal finance site. As an avid online Post reader and recent retiree, I welcome the information and look forward to reading the site. Articles on managing your retirement savings/investments, social security options, medicare options, etc. are all of particular interest to me.

Thanks so much for the feedback! And thanks for the suggested topics. These are all things that we are planning to address in the coming weeks and months so please stay tuned! 

Michelle, I'm looking forward to the new Apple iPhone release. Not because I'm going to buy one, but because I own Apple stock in my Roth IRA :-)

Lol!

 

I would be slightly annoyed if someone in front of me reclined their seat. I would be VERY annoyed if our plane had to make an unplanned landing to kick off passengers arguing about reclining their seat.

You are so on point. Both people are wrong in these cases. Ok, the person reclines. You're mad. But don't act a fool.

Or if you have a knee defender, remove it as instructed. Don't make a scene and then disrupt the lives of others on the flight.

 

Hi Michelle I had written in a few months about weather I should open another checking account and only have my paycheck from my 2nd job (part time) going in there... you advised against it but I did. Since doing that I've used that account ONLY for paying down CC bills. In 3 months I've managed to pay down almost $2500 (the cards got cut up). Granted I have a long ways to go but not having that money from my 2nd job going into our main account has prevented me from spending it. I get paid every Friday from 2nd job and every Friday I transfer that money to the CC as payment. At most I only have $30 in that seperate checking acct as it's strictly being used for my debt. I got myself into this debt and I'm going to get myself out. Not sure why you're against opening a separate account like this but it has proven to work.

I don't recall the question really. I might have been against it if you cost you a lot of money for the 2nd account. But generally i don't have a problem with people having separate accounts for missions like yours. I know I would have told you to take the extra money and pay down the debt (while all making sure you have savings).

At any rate good for you for sticking to the plan and getting rid of the debt.

Hi Michelle, Thanks again for these great chats. Before I get to my question, I want to compliment you on imparting your financial philosophy on me. I can't count the number of times I've looked through your "lens" trying to understand a financial issue. Moreover, while trying to best draft a question to you I've thought through the issues leading to a fiscally responsible solution. So thank you for that. As to my question. I have 2K in credit card debt. about $200 in an emergency fund, no life happens fund. I'm aggressively savings towards retirement (10% plus employer matching > 10%). My budget allows paying $700 per month against debt. How should I allocate the $700? My current plan is all available money towards the credit card. But I'm wondering if I should use $500 against the credit card and $200 in savings as an emergency fund. Then put all $700 into savings once the card is paid off.

Thank you for your note about how I've help. I'm here to serve.

I believe that even when you are in debt, you have to have some savings. Perhaps not 3 to 6 months of an emergency fund but enough for a major hit such as a car repair. If you don't have savings and something comes up, what will you have to do?

Get into more debt

So I like you plan. I would add that once you have a few thousand saved you can stop saving and throw all of the $700 to the debt. Then once the debt is paid off, sock all of the $700 in savings building both an emergency fund and a life happens fund. Emergency fund aim for minimum of three months living expenses to up to six or even 12 months of living expenses. In the life happens aim for a few thousand for the things in life that happen.

Good luck.

If you want to payoff your 30 year mortgage early you can also pay 1 or 2 extra payments per year - be sure to indicate on the check that is for principle only.

Thanks for the add on reminding people to indicate the extra money is for the principal. 

Basic considerations for others around us will help all of us. Not just traveling either.

Amen!

I don't know if it's important to you at all, but look at schools in both neighborhoods. Better school districts generally correlate with better neighborhoods.

Something else to consider.

Thanks.

The decision to payoff a mortgage early depends on several factors one of which is - how long are you planning on staying in the house? If you plan to retire and live there into eternity, paying off early will pay off -- but for many of us who plan to leave the area, downsize etc...putting more toward retirement and savings usually payoff too. Love your advice Michelle!

You have a point. I wouldn't dump money into a mortgage if I was planning on moving in 5 or 7 years. But it doesn't have to be an eternity either. I want to move but may not. Still want to be free of the mortgage. 

My husband and I are about 5 years away from retirement. We are in good shape with 2 pensions, social security and 2 healthy 401k's (along with 2 houses that will be paid off). I look at my children just starting out and I don't know how in the world they will ever retire. Pensions have gone the way of the dinosaur and social security will likely be quite different. How can kids nowadays possibly save enough? What was always preached to me as '3 pronged' retirement savings is really mostly down to what the individual can save....

The million dollar question! While pensions were never offered by 100 percent of companies they are much harder to come by today and people are really much more responsible for their own retirement. There are so many things that get in the way, not all of them in our control, and as I wrote not too long ago about 20 percent of people close to retirement age have nothing saved.  So the answer is to do what you can. Tell your children to put enough into their 401(k) plans to get the company match, and anything else they can put away should go into a Roth IRA or other savings account. The second part is to be aggressive with the way they invest those savings, if they can tolerate it, so that they can increase their chances for seeing stronger growth. But mostly you want them to start early so that they can take advantage of their biggest asset--time! 

I would add two more things:

-- Live below their means. 

-- Shun debt as much as possible

 

Hello! I'm a 33 year old professional, starting a new job. My new 401K has different funds than my previous, so I'm trying to figure out how to balance my money. What percentages should I follow, with stocks, bonds, etc, at my age? I'm looking to do 6% traditional with employer match and 4% in a Roth. Is this a good idea? Thanks!

First of all, congratulations on the new job! I know this is overwhelming, having just gone through it myself a few months ago. I can't tell you what exact percentages you should stick to but I can say you will probably want the majority of your savings to be invested in stocks, since you are still decades away from retirement age and would have time to recover from any losses. You probably also want to chose the funds with the lowest expenses ratios. Some of the pricier funds may seem promising, but it's really tough for fund managers to consistently beat the market. Lastly, yes that savings rate makes total sense. You want to put enough into the 401(k) to maximize the matching contribution but a Roth is a smart choice for the remainder of your savings. I applaud you for saving 10 percent. It's generally recommended to save 10 percent to 15 percent in your 30s.

Son graduated at the end of May with an engineering degree. Don't believe everything you hear about STEM related fields....the jobs are not a given and he's really struggling with how long his job search is taking. All along he (and we) heard "good for you! At least you'll have a job when you finish!" Not the case....

You make an excellent point. I have several friends with kids who majored in the STEM area and they are having a lot of trouble finding work even with several summers of  good internships. The problem is they are competing with a lot of people with a lot of experience who lost their jobs thanks to the Great Recession.

I do hope your son finds a job soon!

I pay my mortgage online, and when I set up the transfer, there is a place to indicate what any extra payment is for. Of course, I don't escrow anything, and the mortgage is through a customer-friendly credit union, not a fee-driven bank, so that might be why it's easy to get the extra payment to the right place. But paying online makes it easy to get the extra exactly where I want it.

Thanks. 

The key is to make sure and then go back and double check any extra money you intend to go to principal is actually being applied.

Hi Michelle - I've never been a recliner, though I will recline just a bit to give myself some breathing space if the person in front of me reclines all the way into my lap. I think fully reclining is rude behavior; recliners always think in terms of their own rights, but how does society operate if all of us go around focused only on our own rights, with no thought of our responsibilities to others? I would never confront a recliner, though. Rude people have a way of turning nasty in a heartbeat. And, the whole planeload of people doesn't deserve to be massively inconvenienced because I'm in a snit. So, like you, I would just suck it up.

Please sit in front of me on every flight I take!

Agree with Michelle's suggestion to live below your means! My husband recently finished grad school and is now making x5 times the amount that he earned on his student stipend. Our standard of living has barely changed (but we do buy the fancy pre-washed salad mixes)

Salad = me too :)

Got to splurge sometimes. 

 

We basically have our financial affairs in somewhat order,e.g., life happens fund, emergency fund, retirement fund, life insurance, health insurance, wills, etc. Now with a college student who is working and paying for college and coming to the close of college, hubby and I are thinking the best gift we can give is dips and dollops of cash in a Roth IRA for DD. We figure $100 here and there before age 25 in an index fund will be the gift that will keep on giving especially 25 years from now. Actually now that I am thinking about it, maybe we will use her college allowance money once she graduates as the funding source.

Good job having all of those affairs in order-- it's not easy to pull off. Is your college student taking out loans to pay for school? If so, I would say that it's probably better to use the cash to help her pay down student loan debt, or any debt! Then yes, it would be a great idea to pitch in for a Roth once she starts working. 

Just one caution. You might hold back, put the money in a savings you control and see what your 25 year old does on her own. Give young adults too much or make the way too easy and sometimes they start to take things for granted. 

I believe in helping with college, down payment on a home but then let them save and build their own retirement. Certainly you can have the funds set aside so that if saving is difficult because of the career or job market the money is there to help but be careful about doing too much.

We want her to launch and be able to save for her own retirement, which has the affect of also making her live below her means and spend wisely. 

I'm 62 retiring end of this year. No mortgage, no debt. I have a pension of $50k a year. My expenses have been utilities and food. Savings, Cash $50k ( I know too high) Mutual funds $2.0m (1.5m in 401 IRA) Question. Should I take SSI $30k or delay? Should I take savings in place of SSI. I AM IN GOOD HEALTH. (30k would be all I need to make 80k and a comfortable living. ) I feel SSI may be cut in the future or SSI tax rate increased due to my large savings . My mutual funds are great pulling in double digest with expense /fees less than 1%. I know SSI grows at 8% but my funds are doing better. I see in general SSI payoff point is age 84 So is this a big gamble?

The options for when to take Social Security can feel endless, but I would say it's generally recommended to wait if you're in good health and can put it off. That's because the boost you get, where SSI benefits grow by 8 percent for each year you put off collecting beyond full retirement age, are hard to find anywhere else. There's always some level of uncertainty no matter what choice you make. Your funds are doing better now, but the market has been performing strongly and there's no way of knowing how your funds will perform next year.

 Try to put it off until you reach your full retirement age, and then if you feel comfortable, until age 70, which is when you get the maximum benefit.

Michelle- In our efforts to be totally debt free when we retire in 4 years, we took a 10 year refi-mortgage about 5 years ago and are paying it off as though it was a 6 year mortgage. We have no credit card debt (that was a mountain to climb!), so we are paying it off almost painlessly. And you save TONS.

If you could see me, I'm pumping my fists in joy!

My husband is tall and I'm not. When we book long flights, we try to select seats so I am seated in front of him, so he knows he won't have someone reclining right in front of him!

Wow! Never heard of that strategy.

Makes sense.

But wouldn't work for me. I love sitting next to and whispering to my fine husband. Yet, might have to give it some thought since he too is tall.

I just checked out the new Get There site and it looks like a lot of good information. The article about recouping college degree costs caught my eye. It appears that currently it takes approximately 10 years for a graduate to recoup college costs. I'm not sure if this calculation includes only tuition costs, excludes interest costs, etc but overall, the 10 year pay back goes against the stories we hear about huge debts extending for 20 or more years. Are those cases the exception with most people having reasonable college debts?

Thanks for taking a look! It's important to remember that the 10 year time period is an average, and that there are plenty of exceptions. People who take longer than 4 years to earn their degrees may have a different experience. Same with people who struggle to earn jobs after graduating, and there are unfortunately a lot of people in that situation. 

I don't fly all that often but I do feel some annoyance when the person in front of me reclines. It seems that when you recline you don't really increase your own legroom, but you definitely impact that of the passenger behind you. I really don't think it's a well thought out plan for planes and I certainly don't have warm and fuzzy feelings toward those who say, "I paid for it, I'm going to recline." I choose not to recline in order to be considerate of those behind me, but I I think that on 100 % of the flights I've been on, the person in front of me reclined. And my legs are not particularly short, so it's uncomfortable. I really feel for much taller folks. But reclining really doesn't increase leg room I don't think--just reclines your upper body--into the leg space of the person behind you.

I love that so many people have said they think about the person behind them. Good for you. All about the Golden Rule. 

DD followed Zack's advice and picked a college with a generous scholarship. DD started a Roth IRA @ 16 with first job. Money mgmt skills have financed her living expenses so that she no longer gets a college allowance. You would swear she is Michelle's daughter when it comes to savings. LOL!

Wait, sure she isn't my daughter. Because sounds just like my kid, Olivia. We promised her a monthly allowance but she hasn't asked for it or needs it because of the way she saves and spends. I'm so proud of her cheap self!

Anyway, still think let her save for retirement on her own. But also sure put the money away for her or something else she might need help with such a s home. 

Either way, win/win for all of you. 

Thanks for sharing.

There's a simple formula to figure how much you need for retirement. You need to decide what your withdrawal rate will be--what percentage of your retirement fund you can withdraw that will leave it generating enough income to cover inflation. If that rate is r %, you need 100/r times your annual expenses in retirement. Here's a strong argument for making r be 4% (i.e. you need to save 25 times your expenses): http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

This approach makes sense. Some people also say that it is important to be flexible about how you draw down the cash so that you can adjust from year to year after a big event or emergency. 

Thank you all for the wonderful questions, and Michelle, thanks again for having me! Hope you learned something. Please come back and check out Get There, where you'll find Michelle's columns and other stories. You can also follow along on Twitter here.  

Great questions, comments and suggestions. Love this forum and the folks who participate. Thank you for sharing your time with me and really for hearing my thoughts on your financial issues. I try my best to give you good information.

Special thanks to my colleague and guest Jonnelle Marte. 

If you haven't already please take a look at the new section Get There. I like it. Give us feedback.

If you have a question that I didn't get to you can Tweet me @SingletaryM and I'll try to answer later. 

Thanks again for joining me today.

In This Chat
Michelle Singletary
Michelle Singletary writes the nationally syndicated personal finance column, "The Color of Money," which appears in The Post on Thursday and Sunday. Her award-winning column is also carried in more than 120 newspapers. In her spare time, Singletary is the director of a ministry she founded at her church, in which women and men volunteer to mentor others who are having financial challenges.

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Jonnelle Marte
Jonnelle Marte writes The Post's "Get There" personal finance column.
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