A key thing for raising young adults is for them to appreciate what sacrifices parents have made for them and develop responsible behavior in all areas of their lives. That is the best ‘gift’ parents can receive (and verbal and other love expressions!). The entitlement mentality has to be dissolved early - because there is no end on that if it is not ‘nipped in the bud’ - a child will not grow up if they constantly have to rely on mommy/daddy.
It is healthy to live below your means. You then don’t have the stress of worrying about money.
Even the ones who know about investing often don’t know about investing, because they are humans before they are investors. There are many biases that can cloud intelligent and knowledgeable people.
AttorneyMother mentioned Drexel Burnham. I worked at a bank for a highly placed ex-executive at Drexel, who not long before the firm went under chose to keep a lot of his deferred comp in company stock. He was sure that he was going to hit a home run. His optimism survived, and he was okay, but it was a rough lesson for him that emotions should not rule investment decisions and that the desire for a home run should not trump the need for diversification.
It goes to show what “little” means to different people. When I was doing post-doc, we got paid really “little” that one of my fellow post-doc who went to medical school before changing to getting PhD worked part time at a hospital to supplement his income. He wasn’t getting paid anywhere close to an intern or a resident. but he got paid just as much as a part timer as what his post-doc position paid.
Several very good posts. Yes, I agree that the main purpose of this thread is for us to learn from each other in terms of “how to”. Because one person’s “enough” will not be the same for others. It is useless to debate how much is enough.
All are relative to one’s desires, habits, and environments. They are, also, all depend on one’s choices.
One could like to have a pet and use expensive cell phones with reoccurring monthly cost. Or one could save those and spend on one nice trip. etc. etc.
When DS was doing research in his gap year, many of his coworkers (including his mentors) were post-docs. One of the post-docs had been trying hard to switch from his research career to the medicine career. (I think he was likely a grad from some foreign med school in his “previous life” but failed or even did not attempt to get an residency position in US before.) I heard he had no problem with any of those “written” board tests like STEP-1 and STEP-2 CK, but STEP-2 CS which is designed to screen out such a student, could present a big challenge for him. Considering the fact that he had been trying to “throw away” his 5+ years of post-doc research experience and started on another track from scratch, it is likely true that the post-docs could be among the most abused group of workers. Not sure whether he was successful or not in the end.
Another case: When DS was on his 2nd look at UTSW (he did not attend that school in the end), he met a prospect MS1 student who might have a similar challenge unless he stays on the research scientist track. (I heard that this MS1 student at UTSW had had a couple of years of medical research experience at Stanford after he had got his MD from a “wrong” country before he got into UTSW. So he decided to get another MD in the “correct” country, i.e., in US, again. A somewhat strange case, but it could be a win-win situation for both UTSW and him if his ultimate goal is medical research.) I guess a few research-heavy med school might admit few (very few!) of such research-focused students who may not be interested in matching into a residency program at all after graduation, but almost all other med schools have no interests in such a student.
Oops, forgot this is an retirement thread. Sorry for the tangent. (For these two cases, the post-doc and the one at UTSW, it could be many years before they can afford to save for their retirement because of their choice of being at a school or a research institute for too long. Being associated with schools for too long could be not good for his/her “retirement planning”. Now, the topic is somewhat tied to “retirement”. LOL.)
Minimum wage in L&D ward (during 4th year med school): minimum wage ($3.80/hour) in 1990
Neighbors’ babysitter: $5.00/hour
We remarked that it paid less to help deliver a baby into the world than it paid to watch her. The experience and lasting stories, of course, were priceless.
The three most important things I’ve learned about investing for retirement are diversify, keep expenses low (stick to index funds), and start young. We can’t do anything about #3 for ourselves, but our children can benefit from our lessons-learned-too late. I’m impressed with the number of parents who seem to have successfully instilled good financial skills in their children. It’s not too difficult to teach the importance of living within one’s means, but the intricacies of retirement planning are beyond the realm of what many college students are ready to master. The value of the time factor is so great that every kid should be encouraged to open a Roth IRA as soon as they have their first job, even if they’re not quite sure what an IRA is.
Now, back to the discussion about Roth IRAs and the benefits of converting.
Let me see if I am understanding the full extent of the advantages of making a Roth conversion. Because it is possible that one’s post-retirement income tax rate will be the same as one’s pre-retirement tax rate. It is a good problem to have, for obvious reasons, but it may not be a full picture because there are benefits to the Roth that are less explicit in that Roths also minimize the incurrence of taxes in other areas.
If anyone has anything to add or if I have misunderstood information, please feel free to correct:
(2) Withdrawals from the Roth by surviving spouse of owner have the same benefits because surviving spouse can make the Roth his/her own and have all of the benefits in (1) above.
(3) Saving during retirement: You can make contributions to a Roth if you continue to work in retirement as long as you stay within the income limits. Traditional IRAs do not allow contributions after age 70 ½.
Feel free to add anything else that I have overlooked.
^^ Roths also add to the effective amount that you can pass down within estate limits. For simplicity, let’s assume the limit is $1M. Effectively, $1M in a Roth would be ~$1.5M in a 401k, since the limit is applied to a post-tax amount rather than a pre-tax amount. Not explaining it well, and it’s definitely a first-world benefit, but it might be germane especially if limits are lowered.
Also, you are effectively pre-paying taxes for your non-spousal heirs.
Because the Roth owner has “pre-paid” income taxes on the Roth balance, he is essentially also “gifting” the pre-paid income taxes to the next generation. I will add it to the list. Please double check my wording on (3):
(2) Withdrawals from the Roth by surviving spouse of owner have the same benefits because surviving spouse can make the Roth his/her own and have all of the benefits in (1) above
(3) Transfer of ownership of a Roth to non-spouse heirs: because the balance of the Roth is post-income tax, the Roth owner is essentially pre-paying the taxes on all deposits and “gifting” those pre-payments of income taxes to the non-spouse heirs (without those payments being deemed “taxable gifts” and incurring gift taxes). By doing so, the Roth owner is also reducing the size of his taxable estate.
(4) Saving during retirement: You can make contributions to a Roth if you continue to work in retirement as long as you stay within the income limits. Traditional IRAs do not allow contributions after age 70 ½.
@AttorneyMother, your ability to write #3 clearly and succinctly is the reason that my (non-practising) attorney sister felt that I would have loved law school (but would have hated practicing). DS might actually do it (p ~ 20%) for the logic and clarity, although he says he gets a lot of the same effects from math.
Thank you, @IxnayBob. I can also write in obtuse fashion, so your compliment may be misplaced.
Do you (or others) have thoughts or analyses about the opportunity cost of the tax payment itself though. When I’ve run the Roth calculators, it is unclear (using your $1,000,000 tIRA example) whether the growth potential of the $500,000 tax payment for the next 20+ years is factored into the equation. Everything else being equal, that $500,000 could happily be growing in a taxable account, get the step-up at death and your heir could pay capital gains tax.
Yes, that might end up exceeding the estate tax limit, but the Roth IRA growing for another 20+ carries the same estate tax risk.
Again, we have to use current tax law as the basis for analysis. So, let’s not worry about what might happen if income tax rates change and tax diversification for the time being.
Have you seen discussions where someone actually addressed the issue I raised?
This paper addresses that issue in some depth, as part of a broader analysis of whether Roths in general make sense for most people. It’s the best analysis I’ve seen about this.
The author’s conclusion is that for most people, Roths are not better:
Thanks, I’ll take a look at that link. I’m not looking for a comparison of pre- and post-retirement marginal tax rates, because I’ve assumed that problem away. I’m looking for other considerations, all of which yield different results for individual cases, and that many of the Roth articles don’t address. I understand that part of that concept is the reason why the more detailed discussions address post-retirement “effective” rate instead of marginal rate. But, it’s still helpful to know what goes into the hopper.
We can’t do anything about #3 and our income has always been much lower than $450,000. No wonder I think Roth IRA or Roth 401K has nothing to do with us.
How can we “stick to index funds” but still “diversify”? When we were in the bank, the FA there who tried to sell us some products kept telling me that buying SP 500 only is risky because it is not a diversified investment for our nest egg (at an old age.) Is there something else like Russell 2000 that may be more diversified but still has low expenses? What other index funds in addition to SP 500 should we invest in (when we are not that young)? I thought an index fund is an index fund. No matter what kind of index fund it is, it shares the same investment risk with other index funds.
