Comments on: The Top Ten Things To Do With A Financial Windfall http://ownthedollar.com/2010/07/top-ten-thing-to-do-with-financial-windfall/ Own the dollar....don't let the dollar own you. Wed, 25 Jan 2012 14:35:55 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: JoeTaxpayerhttp://ownthedollar.com/2010/07/top-ten-thing-to-do-with-financial-windfall/#comment-22800 JoeTaxpayer Fri, 16 Jul 2010 22:51:44 +0000 http://ownthedollar.com/?p=4374#comment-22800 I've written about my feelings on Roth and it comes down to this - In today's dollars, It would take $68K of taxable income to put a couple at the top of the 15% bracket. Add $18,700 to cover the standard deduction and exemptions, and you need a gross income of $85K. If one were to use the 4% rule for withdrawals and all their money were pretax, it would take $2.1M in pretax accounts to generate this. So, for me the question is, how many people who are in the 15% bracket today are saving at a rate that puts them with $2.1M at retirement? Remember, these numbers inflate over time as well. Maybe my question to you is do you think that rising tax rates will impact even that bracket? With median income just about $50K, I'd suggest 15% represents a good portion of people. Given how poorly people are saving, I think you're forecast that most will be above is way too optimistic. Next - if you'd advise that the young folk still in the 10% bracket take advantage now and use the Roth until they are at 15%. No issue. If you advise that a 15%er who has a bad year and low earnings convert while dropping to 10% just to top off the bracket, good idea. Last - for the lucky few who have a defined benefit pension (remember those?) they are the best candidates for being in a higher bracket. I recall a formula that showed a lifer at one company would retire with a pension equal to 80% of his final average wage. These are the people that can easily slip into a higher bracket. I’ve written about my feelings on Roth and it comes down to this -
In today’s dollars, It would take $68K of taxable income to put a couple at the top of the 15% bracket. Add $18,700 to cover the standard deduction and exemptions, and you need a gross income of $85K. If one were to use the 4% rule for withdrawals and all their money were pretax, it would take $2.1M in pretax accounts to generate this.
So, for me the question is, how many people who are in the 15% bracket today are saving at a rate that puts them with $2.1M at retirement? Remember, these numbers inflate over time as well. Maybe my question to you is do you think that rising tax rates will impact even that bracket? With median income just about $50K, I’d suggest 15% represents a good portion of people.
Given how poorly people are saving, I think you’re forecast that most will be above is way too optimistic.
Next – if you’d advise that the young folk still in the 10% bracket take advantage now and use the Roth until they are at 15%. No issue. If you advise that a 15%er who has a bad year and low earnings convert while dropping to 10% just to top off the bracket, good idea.
Last – for the lucky few who have a defined benefit pension (remember those?) they are the best candidates for being in a higher bracket. I recall a formula that showed a lifer at one company would retire with a pension equal to 80% of his final average wage. These are the people that can easily slip into a higher bracket.

]]> By: Hankhttp://ownthedollar.com/2010/07/top-ten-thing-to-do-with-financial-windfall/#comment-22798 Hank Fri, 16 Jul 2010 22:17:34 +0000 http://ownthedollar.com/?p=4374#comment-22798 Joe, Good point about the credit card requirement really being more than 18% return after taxes are paid. I could not agree less with you about the Roth vs. pretax (401k). You really think that taxes are going to be lower in the future? 20%? No way. It's like you got your percentages reversed. It'll be more like 80% that are in a higher bracket at retirement. Roth is client specific, but it is the better deal for 80% or more assuming that your golden years are in the same tax bracket or higher one, which it will be. Joe,

Good point about the credit card requirement really being more than 18% return after taxes are paid.

I could not agree less with you about the Roth vs. pretax (401k). You really think that taxes are going to be lower in the future? 20%? No way. It’s like you got your percentages reversed. It’ll be more like 80% that are in a higher bracket at retirement. Roth is client specific, but it is the better deal for 80% or more assuming that your golden years are in the same tax bracket or higher one, which it will be.

]]> By: JoeTaxpayerhttp://ownthedollar.com/2010/07/top-ten-thing-to-do-with-financial-windfall/#comment-22797 JoeTaxpayer Fri, 16 Jul 2010 20:06:31 +0000 http://ownthedollar.com/?p=4374#comment-22797 That 18% credit card is like earning 25%! You owe $10000. It takes $2500 to net the $1800 to pay the interest (if you are in the 28% bracket. The Roth is very client specific. I'd ask what bracket they are in now, how old the are, how much are they saving, and how much do they have saved. Overall, I believe few (as in less than 20%) people will retire in a higher bracket than when they worked. Most of these people should maximize pretax accounts first, in my opinion. Missing item - get a relative friend out of their situation. Depending on the size of the windfall, I have a few people I'd help out, for example, a godfather who is retired, but still has his mortgage. What a great gift to be able to give him $52K/yr for the time it takes to kill that loan. (One can give $13K with no gift tax. A couple can gift an individual $26K, so couple top couple is $52K) That 18% credit card is like earning 25%! You owe $10000. It takes $2500 to net the $1800 to pay the interest (if you are in the 28% bracket.

The Roth is very client specific. I’d ask what bracket they are in now, how old the are, how much are they saving, and how much do they have saved. Overall, I believe few (as in less than 20%) people will retire in a higher bracket than when they worked. Most of these people should maximize pretax accounts first, in my opinion.

Missing item – get a relative friend out of their situation. Depending on the size of the windfall, I have a few people I’d help out, for example, a godfather who is retired, but still has his mortgage. What a great gift to be able to give him $52K/yr for the time it takes to kill that loan. (One can give $13K with no gift tax. A couple can gift an individual $26K, so couple top couple is $52K)

]]> By: Split Centshttp://ownthedollar.com/2010/07/top-ten-thing-to-do-with-financial-windfall/#comment-22796 Split Cents Fri, 16 Jul 2010 19:56:39 +0000 http://ownthedollar.com/?p=4374#comment-22796 I am so glad that paying off debt first was listed as #1. Also, I am *thrilled* that so many of your suggestions focus on enjoying the money! Focusing only on down payments, emergency funds, etc can suck the fun right out. It is absolutely essential that at least some of the money go to something enjoyable. I am so glad that paying off debt first was listed as #1. Also, I am *thrilled* that so many of your suggestions focus on enjoying the money! Focusing only on down payments, emergency funds, etc can suck the fun right out. It is absolutely essential that at least some of the money go to something enjoyable.

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