That's a good reading list.
I'd also suggest adding r/wallsteetbets to your list. Just kidding. Don't do that.
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The Retirement Planning/ Investment/ Savings Thread (3 Viewers)
- Thread starter inca911
- Start date
I'd also suggest adding r/wallsteetbets to your list. Just kidding. Don't do that.
Strap in, you'll go to the moon! Diamond hands and all that.
The website www.bogleheads.com is sort of a PCF of financial advice.
Most of its members share a strong point of view about investing and retirement planning. If I had to summarize, it is based on the ideas that (a) you should never try to time markets; (b) that it is foolish to try to pick stocks, as opposed to being broadly invested in the overall market and diversified across asset classes; and (c) that you should settle on an asset allocation which reflects your long term goals and stick with it, rebalancing as needed, but not changing the AA based on market swings.
There is a lot of general introductory material, and I would not advise asking questions without first reading extensively on the site unless you want to get flamed...
Kind of the same way you would not want to log in to PCF for the very first time and immediately ask how much your set of 3,000 dice chips are worth, without poking around a bit beforehand.
Most of its members share a strong point of view about investing and retirement planning. If I had to summarize, it is based on the ideas that (a) you should never try to time markets; (b) that it is foolish to try to pick stocks, as opposed to being broadly invested in the overall market and diversified across asset classes; and (c) that you should settle on an asset allocation which reflects your long term goals and stick with it, rebalancing as needed, but not changing the AA based on market swings.
There is a lot of general introductory material, and I would not advise asking questions without first reading extensively on the site unless you want to get flamed...
Kind of the same way you would not want to log in to PCF for the very first time and immediately ask how much your set of 3,000 dice chips are worth, without poking around a bit beforehand.
dajebriza
Two Pair
It's also worth talking about real estate since a home is the most expensive and possibly best investment a person may hold long-term during their life time. Take a look at your mortgage interest paid to the bank over each year of the home loan term and the total amount paid to the bank once it is paid off. You will see the banks have stacked the game completely against you and get the majority of their interest up front because they know most people sell homes within the first 10 years and don't stick around in the mortgage long enough for the bank to slowly drink your milkshake. So they speed it up, taking larger gulps earlier in the mortgage. This means it greatly benefits you to pay down your mortgage earlier rather than later. Every dollar you put into your houses' equity early, saves you 2 or 3 dollars later. You can save yourself hundreds of thousands of dollars if you aggressively make extra principal payments each month from the first month of the mortgage. Which is why people should not max out a loan and buy the most expensive home they can afford with basic payments. They should buy a home 20% less than that and make sure they have money left over to make an extra principal payment each month on the loan. This is the best way to deprive the bank of the most interest and keep that money in your pocket. By doing this, you are effectively undercutting the bank's interest rate and over time, paying a much lower interest rate to the bank, despite what the terms of your mortgage say. Banks hate this.
Rental property. If possible, especially with interest rates probably as low as we will see them in our life-times right now, own rental property. It's tough for a lot of people to think about buying a second home, but you can qualify for a primary home loan with the lowest interest rate on a second home by moving. Move out of your primary home and into a low-rent apartment temporarily, putting a lot of your stuff in storage if needed, and rent out your home. Then you have rental income to claim to offset the debt to income ratio of your mortgage on that home and can apply for another primary home loan to buy a second home you will then move into. Now you have two homes with low interest rate mortgages, one if which is a rental property. Eventually move back into your first home if you like it better. The banks don't care which home you are living in once they have lent you the money.
Rental properties are like money generators/batteries. They give you large tax breaks on depreciation, mortgage interest and upkeep expenses, while generating rental income (5% or more of the home's value generally), and they appreciate. Which means not only do they pay you income, but they become more valuable over time. Basically, someone else (your tenants) are buying a home for you over time that will be worth a lot later and doesn't cost you much, if anything now. You can use this rent income to supplement retirement later, sell the home outright for a large cash infusion or reverse mortgage it for more steady income. It's generally win-win-win on all fronts.
Rental property. If possible, especially with interest rates probably as low as we will see them in our life-times right now, own rental property. It's tough for a lot of people to think about buying a second home, but you can qualify for a primary home loan with the lowest interest rate on a second home by moving. Move out of your primary home and into a low-rent apartment temporarily, putting a lot of your stuff in storage if needed, and rent out your home. Then you have rental income to claim to offset the debt to income ratio of your mortgage on that home and can apply for another primary home loan to buy a second home you will then move into. Now you have two homes with low interest rate mortgages, one if which is a rental property. Eventually move back into your first home if you like it better. The banks don't care which home you are living in once they have lent you the money.
Rental properties are like money generators/batteries. They give you large tax breaks on depreciation, mortgage interest and upkeep expenses, while generating rental income (5% or more of the home's value generally), and they appreciate. Which means not only do they pay you income, but they become more valuable over time. Basically, someone else (your tenants) are buying a home for you over time that will be worth a lot later and doesn't cost you much, if anything now. You can use this rent income to supplement retirement later, sell the home outright for a large cash infusion or reverse mortgage it for more steady income. It's generally win-win-win on all fronts.
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moose
4 of a Kind
Huh?
WTF?
The interest you pay is higher earlier in the mortgage for the simple fact that you owe more money and the payments you make are equalized over the amortization of the mortgage, so a greater amount of your payment is interest. It is simple math not the banks "stacking the game completely against you".
Yeah...I’ve recently spent lots of time lurking on that forum. Overall I share their viewpoints.
dajebriza
Two Pair
That's my point, the equalization over the amortization of the loan period is a formula that greatly favors the lender over the borrower. Every month, the unpaid interest accrues to your mortgage balance. Say you took out a mortgage for $500,000 with an interest rate of 4.5% and a term of 30 years. You're not actually paying just 4.5% of $500,000 as interest; you're paying interest on what remains of the balance after each payment each month.
This means that 15 years into a 30 year mortgage, you haven't paid off 50% of the loan. You have only paid off 30% of it on a 4.5% APR interest rate. If you only stay in the mortgage for 15 years or less, you have paid mostly interest to the bank and far less on your home. You are only paying off the majority of your home in the back half of the loan term, with most of it in the very last few years.
Year 1, you are paying $1875 a month of interest to the bank and only $658 to yourself in the form of principal on your home.
Year 30, you are paying $111 interest and keeping $2422 in principal payment.
The loan is set up to pay down principal the slowest up front, maximizing interest to the bank and slowing the payoff of the home until the back end of the loan. This is an amortization schedule that greatly favors the bank over the borrower. To make this arrangement more favorable to the borrower, they would/should make larger principal payments as early in the loan as possible.
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Poker Zombie
Royal Flush
I think your endgame is sound, but how you got there is wrong. The banks aren't stacking the game against you. They are just collecting the vig on what you owe. Owe less, pay less. It's not complex.
Real Estate agents that show you houses at, or just above, the top of your expected range to get a little higher commission are stacking the deck against you. You falling in love with a house that is at the top of your range also stacks the deck - against yourself. It's a vicious circle of greed.
My house is pretty darn small. One of the smaller ones in my county, and far below the average home size for the area - but it is paid off.
We all make sacrifices. Years of school or years of partying. Small house or a big house. Working until you are 55 or working until you are 65. Buy on credit or go without. China Clay or Paulsons.
Retirement is easy. It's picking the choice you will be happy with that is hard.
Real Estate agents that show you houses at, or just above, the top of your expected range to get a little higher commission are stacking the deck against you. You falling in love with a house that is at the top of your range also stacks the deck - against yourself. It's a vicious circle of greed.
My house is pretty darn small. One of the smaller ones in my county, and far below the average home size for the area - but it is paid off.
We all make sacrifices. Years of school or years of partying. Small house or a big house. Working until you are 55 or working until you are 65. Buy on credit or go without. China Clay or Paulsons.
Retirement is easy. It's picking the choice you will be happy with that is hard.
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dajebriza
Two Pair
These are age-old money lending practices that were always designed to greatly favor the lender over the borrower. It's why money-lending has historically proven itself to be a long-term path to extreme wealth. Sure, borrowers benefit from being able to borrow and leverage the money of other's but the terms don't remotely favor them and it has been designed that way for a reason.
Oh, and don't forget they get to keep the house at its full value and all your equity if you fail to pay.
Oh, and don't forget they get to keep the house at its full value and all your equity if you fail to pay.
moose
4 of a Kind
You think it is some formula the banks invented to give them an advantage over the borrower. It's not. It's math. Plain and simple. If you are levelling the payments then you will pay a far greater amount of interest than principal, the longer the borrowing period, the higher the interest rate and the greater amount borrowed.
Imagine if the payments weren't levelled no-one would be able to afford a house because if you wanted to pay an equal amount of principal each payment + the interest owed then the early payments would be sky high and then slowly decrease over time.
There simply isn't another way to do it and level the payments so you pay an equal amount each period. If you can afford it and your mortgage terms allow it, then make extra payments that will then apply directly to the principal or go for a shorter amortization period.
Learn math and stop inventing "age-old" bank conspiracy theories that don't exist.
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dajebriza
Two Pair
Yes. It's called 'opportunism'. Not a conspiracy, just human nature to exploit one-another when one has the advantage over the other. The banks don't exist to help people buy a home and leverage their money effectively. They exist to take advantage of people's collective assets, their need to have access to money they do not have and exploit them for it on terms they dictate.
Banks are loaning money on mortgages around 2.25% interest. It feels like a stretch to say they're taking advantage of people. Nobody makes you buy a home and nobody makes you do it on loan. Most financial advisers would tell you to go take a loan on your home, if it's paid off, and throw it in the stock market at these rates. You're making money off of their money. I believe in altruism, but everything can't be free.
Poker Zombie
Royal Flush
I'm not saying banks aren't greedy. Balloon mortgages, sub-prime lending, and basically anything that was stopped by the Dodd-Frank act.
That's not human nature.
I have risked my life on multiple occasions to help others. Sometimes for little or no pay. Sometime without recognition. During the 2001 terrorist attacks, tens of thousands of Chicagoans, who had reason to believe the Sears tower would be hit next, calmly packed into trains and evacuated the city.
That's human nature. We look out for each other. It's how we survive as a group.
Yes, some people prefer profit as their driving motive, but they are the outliers. I would compare them to the terrorists. They think they are doing what is right, and there are a lot of people that would support them, but they are not acting on human nature, they are acting on some learned principles that go against human nature.
That's not human nature.
I have risked my life on multiple occasions to help others. Sometimes for little or no pay. Sometime without recognition. During the 2001 terrorist attacks, tens of thousands of Chicagoans, who had reason to believe the Sears tower would be hit next, calmly packed into trains and evacuated the city.
That's human nature. We look out for each other. It's how we survive as a group.
Yes, some people prefer profit as their driving motive, but they are the outliers. I would compare them to the terrorists. They think they are doing what is right, and there are a lot of people that would support them, but they are not acting on human nature, they are acting on some learned principles that go against human nature.
moose
4 of a Kind
dajebriza
Two Pair
You're a mathematician, banker and a psychiatrist! I'm impressed.
Time value of money. Variables are frequency, interest, and time period. If you made weekly payments instead of monthly, your overall interest and total amount paid would be lower. No magic or trickery, just compounding. Yes, pay more interest to pay off sooner. Borrow less, use shorter term loans, and throw money at debt until it is dead or you will always be a slave to the lenders.
And save because that same power of compounding interest works for you too.
T
And save because that same power of compounding interest works for you too.
T
RainmanTrail
Straight Flush
That'd be great if that's how mortgages were actually structured. Unfortunately, nearly all loans today are not. You still get charged the same interest each month regardless of which day/s you paid on.
Wow, is that really the case for mortgages in the US? Or just fixed interest ones? Funny how different these things operate in different countries.
Interesting, so you are saying that your note has a fixed interest payment that does not change based on principal? So if you pay $10k extra principal payment because you got a bonus, they do not reduce the interest? Seems off.
Frogzilla
Straight Flush
Paying principal early will reduce your interest charge. Paying your mortgage in weird weekly installments instead of monthly may or may not be paying your principal early. Some lenders may default to collect these for you and make your monthly payment when you submit the last one.
But all that aside, when interest rates are this low it’s practically free leverage, and I dont think that minimizing free money is the best use of time
But all that aside, when interest rates are this low it’s practically free leverage, and I dont think that minimizing free money is the best use of time
US mortgages are pretty good based on my experience comparing them to those offered in other countries. For one, you can get a fixed rate over the lifetime of the loan - I have not seen this elsewhere - usually if rates are fixed, they are fixed for a short or medium term (say the first 1 to 5 years). The other thing is that there are no pre-payment penalties in the US. My only complaint is the preference towards 30 year terms. In the end this doesn't really matter as there are no pre-payment penalties but the less financially aware can be taken advantage of.
I remember a lot of people in the 80s/90s were sold Endowment mortgages where you paid interest every month on the total sum due and the rest of your payment went into the stock market with the idea that the growth would exceed the extra interest paid and you would get tax relief on the growth. Many people ended up screwed by these mortgages - primarily because the fees they were charged for managing the investments were so large and the tax relief was scrapped such that any potential benefits were lost and they actually ended up owing money after they thought they were done.
With interest rates as low as they currently are and a bit of education, the endowment mortgage may make a lot of sense right now - provided that all the benefits aren't lost by the seller charging you lots in fees for managing the investment.
I will say one final thing though - even if it's financially savvy to leverage your mortgage to invest in the markets, you are exposing yourself entirely to the market. If you lose your job and the market crashes, you're screwed unless you have enough of a slush fund to ride the wave. Most people don't. Personally, I have my money in the market and money in real estate and don't mix the two.
I remember a lot of people in the 80s/90s were sold Endowment mortgages where you paid interest every month on the total sum due and the rest of your payment went into the stock market with the idea that the growth would exceed the extra interest paid and you would get tax relief on the growth. Many people ended up screwed by these mortgages - primarily because the fees they were charged for managing the investments were so large and the tax relief was scrapped such that any potential benefits were lost and they actually ended up owing money after they thought they were done.
With interest rates as low as they currently are and a bit of education, the endowment mortgage may make a lot of sense right now - provided that all the benefits aren't lost by the seller charging you lots in fees for managing the investment.
I will say one final thing though - even if it's financially savvy to leverage your mortgage to invest in the markets, you are exposing yourself entirely to the market. If you lose your job and the market crashes, you're screwed unless you have enough of a slush fund to ride the wave. Most people don't. Personally, I have my money in the market and money in real estate and don't mix the two.
Counterpoint:
Absolutely do not hammer money into your mortgage at ~2% interest annually. It's penny wise, pound foolish. If you have extra money invest in your retirement, return +5-7% annually for as long as you want vs 2% annually of an ever dwindling interest burden.
Also, the house you live in is an absolute shit investment. It's not even close for me. No way my house's appreciation will ever keep pace with the net drain of property taxes, maintenance and incidentals, not to mention real estate commissions, legal fees etc. when it comes time to selling it. Oh and I have to buy a new home that has appreciated alongside mine, and pay yet more fees and taxes.
Absolutely do not hammer money into your mortgage at ~2% interest annually. It's penny wise, pound foolish. If you have extra money invest in your retirement, return +5-7% annually for as long as you want vs 2% annually of an ever dwindling interest burden.
Also, the house you live in is an absolute shit investment. It's not even close for me. No way my house's appreciation will ever keep pace with the net drain of property taxes, maintenance and incidentals, not to mention real estate commissions, legal fees etc. when it comes time to selling it. Oh and I have to buy a new home that has appreciated alongside mine, and pay yet more fees and taxes.
It amazes me the number of people who believe a house is the best investment. I agree with you. 25 years of property taxes and maintenance will exceed any appreciation on our cost to build. Not an investment.
I guess it's more "location, location, location" then, because being in Colorado, our house prices are much higher than other parts of the country *cough*Texas*cough*
The average single family home in CO is roughly $500,000 (Denver is $600K+), and they keep going up....so growing up, I always thought buying was better than renting....and it has worked out pretty well for us....but again, looking at prices in other parts of the country I can see why that sentiment could be true.
The average single family home in CO is roughly $500,000 (Denver is $600K+), and they keep going up....so growing up, I always thought buying was better than renting....and it has worked out pretty well for us....but again, looking at prices in other parts of the country I can see why that sentiment could be true.
Poker Zombie
Royal Flush
...and that's the house you own and love.
People that get into renting properties expose themselves to a second job of maintaining a house where the renter is less concerned about how they leave the place. Sure not all renters are animals, but some are. Even if you withhold a fee for cleaning, it can be a lot of work.
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