Open a Roth IRA and Buy a House? No Thanks.
I'm getting real tired of the typical financial advice out there. It seems that everyone is a personal finance expert these days. Everywhere you turn, people are giving financial advice. My friend, who is employed at a student loan call center, is even giving people financial advice on what to do with their student loans. The fact is, there is no shortage of people who want to throw in their two cents on this stuff.
It all sounds like a bunch of gibberish to me:
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Open a Roth IRA
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Set up an automatic transfer of $50 every month
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Open a high interest savings account
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Contribute to your 401k even though you're broke
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Buy a safe and reliable car at 0% interest or get more for your trade in at the dealership
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Clip coupons
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Shop with Groupon to score deals
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Check the weekly flyers to save big
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Save 15% on your car insurance
Blah, blah, BLAH. It's all garbage. In case you don't know this yet, there's one way to win financially. That's to LIVE BELOW YOUR MEANS. Hello, people. Spend less than you make. This does not require "financial experts". This is simple stuff.
I'd like to focus in on a couple things that really get on my nerves with this stuff. With the exception of very few people I know, I seem to be the only one NOT contributing to a "retirement" account.
I'm Not Sold on "Retirement Accounts"
It's apparently "law among everyone" that you need to open a Roth IRA, Traditional IRA, 401k, 403b, etc. I'm not sold. I don't own one and don't plan to open one anytime soon. First of all, I think it's great that the government gives you tax incentives to save for retirement. After all, if people save more for retirement, they will rely on the government less when they reach old age. That's a good thing long term for the government, tax payers and the economy in general.
But the question I must ask is: Why 59 and a half? Who decided that a person should be "able" to retire at 59 and a half years old? That seems like the age at which people aren't really able to work anymore. It seems like the government is saying that once you're 60 or so, you aren't able to provide a ton of value anymore for the country and therefore, you're allowed to stop working. In other words, the government has said that unless you are 59 and a half years old, we don't want you to stop working, because it's not good for the economy.
So all, with that ridiculous age limit placed on all this, it looks to me like the government just wants us all to work until we can't anymore. And to make sure we work until at least 60, they are tricking us into playing this whole game. Well folks, I'm not playing this game.
This all comes down to what retirement means. There is a new definition of retirement, which Mr. Money Mustache has redefined to be this:
""“Retired” means you no longer have to work for money, and you are aware of this fact. You can then proceed to do whatever you want, as long as you do it consciously and of your own accord. If you meet this condition, and you feel retired, congratulations, you are."
I'm with MMM. Retired does not mean after 59 and a half. Therefore, these "retirement" accounts are bogus for those of us not conforming to the typical "work until you're 65 rat race", if you ask me. Sure, there are "tax advantages" of using these accounts even if you're retiring early, but I'm not participating as it comes at a great cost in flexibility. Sure, you can pull out your contributions at anytime. Sure, you could use this account to fund your late retirement years only. I know, I know, I should be using these accounts "or so the experts say". Before you all blast me in the comments about how I'm an idiot for not using these accounts, here is my disclaimer on it: I KNOW...I could save money on taxes by using them, but I value my freedom more. If that makes me an idiot, fine. I'm okay with that. I'm boycotting them based on principle, not because of the math.
Based on principle? Yes, they are set up to keep people working until 59 and a half. They are set up to influence people's behavior. I'm not participating. I don't care to go through all the red tape of "leveraging" the system to come out ahead. I'm not playing in the system. No thanks.
My assets will be mine to use (and spend if I see fit) whenever I feel like it. Period. Does that freedom cost me more? Yes, it does, but I want the freedom and am willing to pay the price for it. In conclusion, I'm not using these accounts and am not planning to anytime soon.
I Don't Believe Buying a House is the Answer Either
I've ranted about this before too, but I'm not planning to buy a home anytime soon. I just don't see it as an investment, but instead I see it as an expense. I got blasted a while back on my post about reasons to not buy a home, even if you can afford it. The fact is, those who have bought homes get really upset when I suggest that it's not ALWAYS a good idea. Oh well, the truth is, it isn't always a good idea.
But yet, almost everyone I know, given the income, the down payment and the ability to get the financing, would run to the nearest bank and buy a home as soon as they could, if they don't already own one. I believe the push to buy a home is as big as the push to open a Roth IRA (or other retirement accounts).
This is what passes for financial advice these days. According to all the geniuses out there, there are two rules and two rules only for "personal financial planning":
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Open a retirement account, or multiple, ASAP and start contributing x% to it.
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Buy a home
I disagree.
The way to win financially is to stop your damn spending. It's not to use these "genius" tactics above. There is way too much garbage advice passing for common sense going around these days. I'm not participating in it. If people think I'm nuts because of it, so be it.
Lastly, I Googled around for something, ANYTHING, out there on reasons to NOT use a retirement account, and I couldn't find a single thing. Why is it that exactly zero people out there question this whole thing where the government decides when we should retire and how we should save our money? I'm in awe of it all.
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46 Comments
- Well Heeled Blog says:March 17, 2013 at 2:27 PM
I understand your concerns about the age restrictions. For me, though, the age restriction is actually a good thing, because it ensures that I have another added incentive to not touch that money until I'm 60. I'm not sure if my willpower alone will help me get there, so I will take the age restrictions and any tax advantages the government wants to give me! I don't think your approach is wrong. After all, all we can do is figure out what's most important to ourselves, decide accordingly, and live with the consequences. I do think that saving in retirement accounts is the right thing to do for the vast majority of Americans.
- Kraig @ Young Cheap Living says:March 17, 2013 at 2:53 PM
WHB, I do agree with you that retirement accounts are probably good for the majority of Americans who can't save for retirement on their own.
- JeffMo says:April 16, 2013 at 9:24 AM
Retirement accounts are good for not paying as much tax on money that you are quite certain you won't need until those minimum ages. Putting money in them does not mean the government gets to decide when you will retire. Putting money in them simply means that if you get tax advantages for not taking the money out until the specified age. You think there is more freedom involved with not having the government dictate your retirement plan to you. That seems like it would be true, if the government were doing that, but they're only controlling a small part of it: "Don't take this money out yet, cause you promised that you wouldn't take it out early. Of course, if you really want to, you can, but you'll have to pay tax and a penalty based on the fact you claimed earlier you wouldn't take it out." So if that's your kind of freedom, you're good. I just choose to take the freedom of not having to pay as much tax on money I'd be saving for retirement anyway. You are *totally* on-point with your admonitions to live beneath your means. And if you are reacting to people who open retirement accounts, but don't control their expenses, then you might even have a point. I just don't see this as an either-or situation. Why not live beneath your means, AND get tax advantages for money you'll probably need in retirement, anyway?
- Pete Bonani says:August 30, 2014 at 10:07 PM
Amen!
- Tim Turner says:March 17, 2013 at 3:25 PM
Kraig, Good post and certainly food for thought. I am 49 years of age and have split my investments three ways; 401k, Roth IRA and taxable accounts. With the 401K I get a match and I dont want to throw that away. The Roth of course offers me tax free capital appreciation (including dividends) and finally the taxable accounts give me the flexability that you point out. The main overall advantage that I see to my approach is that I cant see the future. I dont know when I will retire or what tax bracket I will be in or if I will become disabled etc. I try to put my eggs in several baskets not only in terms of a mixture of assets but also in terms of how they are treated tax wise. As far as the house issue goes, I think it should be treated as a life style/expense rather than as an investment. I do own a house in a good neighborhood. It has been a nice place to raise the kids and that was the main reason for the purchease. If I am lucky enough to break even with it in the end I will be happy but I am not relying on it for my retirement. The article is thought provoking and for that reason alone was worth the read. Good luck going forward.
- Kraig @ Young Cheap Living says:March 18, 2013 at 8:45 AM
Hi Tim, Thanks for reading and for sharing your thoughts. You're right, none of us can see the future. How that impacts a financial strategy is basically an opinion though. You see diversifying as the right thing to do as I see flexibility as key. When it comes to taxes, if I retire with 100% taxable accounts, I won't be paying any "tax-bracket" or regular income rate levels. I'll be paying capital gain and dividend levels, which should be far less (although I'm no tax expert). Although, I will have already paid the regular income tax in the money long ago. Either way, I like the option of being able to use my money when and how I want to, at any point in my life.
- Steer says:March 17, 2013 at 3:47 PM
Good advice Craig. Watch the spending are words of wisdom that many people should heed. Keep the articles coming! Keep an eye on the Cyprus bailout, or in other words, the Cyprus Robbery. Sometime in the future money in the bank will not be 100% safe. Diversify into some hard assets to balance the risk. IMHO I guess.
- Kraig @ Young Cheap Living says:March 18, 2013 at 8:48 AM
Steer, Thanks for stopping by and for saying hi. I wasn't aware of the Cyprus bailout until you mentioned it. It sounds pretty icky. I'll keep an eye on it. I do have a small percentage of my world in the bank and plan on keeping even less there in the future. My plan is to buy ownership in companies instead.
- Dividend Mantra says:March 17, 2013 at 5:05 PM
Kraig, I agree wholeheartedly on both counts. I also do not fund, or own, any type of retirement account. That's because I really treasure flexibility and freedom above all else. Like you said, you could game the IRA's through the SEPP...but I just won't be working long enough in my life to make the bureaucracy worth it. As far as a home goes, yes it's an expense. Rent is an expense. A house is an expense. Shelter is an expense, period. Whether you own it rent it really matters not. The fact that housing has returned basically 0% over the last 100+ years seems to get lost on a lot of people. I've done the calculations many times, using my area and other areas for actual numbers and renting always seems to come out ahead. Even if renting WERE more expensive (which it's generally not, except for certain markets), I'd still prefer to rent because I think the liquidity and flexibility that renting offers is really priceless. Plus, for those of us seeking early retirement/FI, once we're no longer geographically tied to one area due to commuting to a job we are then free to come and go as we please. We are not only financially independent but ALSO geographically independent. I don't know if I'd much like to be completely financially independent, but then tied down to one city out of the entire world because I own my shelter and am responsible for it. It also comes down to lifestyle. I don't plan on raising a family. If I were to plan on that, owning a house would make more sense. I think it really comes down to what you're looking for out of life. If you really like the comfort of your neighborhood and coming home to the same place for decades, owning might make sense. If you want to become as flexible as possible in life and interested in traveling around for lengthy periods of time once you're financially independent, then I don't know why you would want to buy a house. Great post! Best wishes!
- Kraig @ Young Cheap Living says:March 18, 2013 at 8:53 AM
DM, I think the key to my attitude on all this is, I don't feel the bureaucracy is worth it. Sure, I can save a few bucks on taxes. But how much red tap do I have to go through to make it happen. It just seems like a bunch of "bureaucracy" like you said. Flexibility is a top priority for me too. Although I would like to start a family someday, I'm not super excited about being stuck in one place. I love the idea of having flexibility with my living situation as well. Good stuff. Talk to you soon.
- Paul says:March 17, 2013 at 5:28 PM
If you quit working with the employer who manages your 401k, the withdrawal age is 55 without penalty, not 59.5. You are not an idiot as home ownership only makes sense if you desire long-term geographic stability (raising children)or if you plan on utilizing it as a rental in the future. I've utilized my 401k since my 20's because I did not trust myself to be disciplined to save readily accessible cash.
- Kraig @ Young Cheap Living says:March 18, 2013 at 8:53 AM
Paul, Interesting as I hadn't heard of that age 55 loophole. I'll look into it. Thanks for stopping by.
- krantcents says:March 17, 2013 at 7:46 PM
I believe in having all of them! Retirement accounts and a brokerage account. The more resources you have the more choices you have. I like my brokerage account because I pay capital gains tax vs. incomes taxes based on income. I plan to earn money in retirement too through my blog and related businesses. I can keep the taxes lower by having deductible expenses. As I said, I believe in all sources of income in retirement.
- Kraig @ Young Cheap Living says:March 18, 2013 at 8:55 AM
KC, Nice strategy. I too plan to have a business even in retirement to help fund it!
- CashRebel says:March 17, 2013 at 9:19 PM
Kraig, I've been thinking quite a bit about the ratio of my investments in retirement accounts to taxable accounts. I think having a tax advantaged retirement account doesn't lock you into retiring at 59.5 as long as they are a small percentage of your portfolio. As long as the whole portfolio is growing, it doesn't really matter which part your draw your 4% from each year. You just need to make sure that you don't eat up the whole taxable account by the time you're 60. But I can certainly understand not wanting to play that game. My employer actually funds my retirement account without my input, so I don't have much of a choice there. That being said, I totally agree that the arbitrary retirement age of 60 defined by the government is bullshit. Why should they get to decide? It's not their money! It seems like a good rule for people who don't understand their finances, but for you and me, we should have access whenever we need it...
- Kraig @ Young Cheap Living says:March 18, 2013 at 8:58 AM
CR, I do understand that strategy. I still have a hard time wanting to play that game. That's interesting that your employer funds your retirement account without your input. I didn't know that was possible or even an option.
- JoeTaxpayer says:March 17, 2013 at 11:14 PM
The house? No argument from me. It's not like that you'll rent a place bigger than you need, but buying a too-big house can easily wipe out a chunk of the money you should save each month. The retirement account? Any deposits to Roth (but not the growth) can be withdrawn any time. 401(k) funds can be transferred to an IRA when you leave the job, and an IRA can be withdrawn over your lifetime regardless of your age. Look up Sec 72(t) for details. You prefer to simply invest post tax? That's fine, too, but don't be so quick to dismiss the matched funds of a 401(k). That 'free' money adds up over time and can be 1/3 or more of the value of the account as you get closer to retiring. The tax deferral and potential withdrawal at a lower tax rate is just an extra bonus.
- Kraig @ Young Cheap Living says:March 18, 2013 at 9:05 AM
JT, Thanks for the information. I wonder what kind of impact that "withdrawal over my lifetime" would have on my strategy/life. If I had 20/25k in principle in there and did that, it would likely amount to scraps every month, right?
- Lucas says:March 18, 2013 at 9:37 AM
yes it is pretty low. For early retirees you are looking at 1-3% of assets. But if you have a significant amount in their it can be a way to slowly draw them down without penalty and minimize tax impact. So I have 200k in a 401k right now, so I would get ~$4000 a year right now which would be ~15% of living costs - not to bad. But at that withdraw rate the assets are likely to keep accumulating, so in 5-10 years I can recalculate the amount again with my higher assets and lower life expectancy and the amount would increase. My personal plan is to "retire" and cover most of my low expenses through rental properties and/or part time work for a number of years. During this time I would setup the 401k withdraws and move that money at a very low marginal tax rate into my Roth where it would be tax free in the future and more accessible to me at any time.
- Lucas says:March 18, 2013 at 7:14 AM
Just making sure you are aware of the ways to get money out of "retirement" accounts before 59. 1) Roth - your contributions can be taken out at any time penalty free. There are some additional rules on earnings that let you take them out with minimal penalty. http://online.wsj.com/article/SB125754645803734655.html 2) 401k/IRA - you can bypass the 59 year rule by making "substantially equal periodic payments over your life expectancy". Basically you can get a stream of income based on your balance/life expectancy. http://www.irs.gov/taxtopics/tc558.html I guess I am not worried about the slight decrease in flexibility with using these plans and don't feel like they are trying to lock me in. The reason those limits are there are primarily so most people won't spend themselves into oblivion! I agree that a home isn't always a good investment/decision either. Especially if you aren't sure you are going to be in an area for 5+ years as the transaction costs are pretty high. That said I think it is an excellent way of locking in a housing cost and should be part of many peoples early retirement plan. Note that home doesn't mean 2500sqft house, it could be a sailboat, trailer, small home, etc... pretty much anything outside of a metro area though is pretty affordable :-)
- Kraig @ Young Cheap Living says:March 18, 2013 at 9:06 AM
Lucas, Thanks for stopping by and for providing links to those resources. I'll take a look.
- Lucas says:March 18, 2013 at 9:28 AM
Forgot to add one other thing. House and retirement assets (IRA/401K) don't count against application for financial aid for college (at least at this point in time). But taxable investment assets do. I understand this is a long way off for you to think about with kids at this point, and things may change but I am a bit closer (~10 years) or so before college costs for my kids start hitting. I do not plan on covering most of the cost for my kids (want them to work/figure out a way to do it on their own/etc), but I also don't want to overly hurt their chances at grants/low costs loans. Having low income (ie being retired and living on very little) is also a big factor in financial aid applications, but Assets are a big part of the calculation as well. So yes - the government is incentivizing you to live/work/act in certain ways. Up to you whether you think it is worth it or not.
- Laurie @thefrugalfarmer says:March 18, 2013 at 6:43 PM
Kraig, I think it's great that you're working at creating the path that's best for YOU instead of what "experts" say is best for everyone. The truth is, a financial plan, if it's to be successful, has got to fit the owner's individual needs and goals. There is no "one way fits all." Except for maybe the "living below your means" rule. :-)
- Kraig @ Young Cheap Living says:April 8, 2013 at 8:48 AM
Hi Laurie, You're right about a successful plan having to fit the individual. For some reason, the "experts" out there seem to provide this blanket advice about maxing out retirement accounts. I find it pretty lame. Like you said, living below your means is advice we can all see results from. Thanks for stopping by and for contributing!
- Brent Pittman says:March 19, 2013 at 8:20 AM
I believe you are making wise choices based on your priorities. Financial independence is what you seem to be seeking at the earliest age possible. I also find it ironic that your Google adwords is promoting retirement accounts in this article.
- Kraig @ Young Cheap Living says:March 19, 2013 at 8:40 AM
Brent, Since Google's ads are based on the content of the page, it's on purpose that they are showing on this page. Although I blocked all ads of credit cards, loans and borrowing money, I'm not blocking ads for retirement accounts. I have no problem with retirement accounts (other than not wanting to use them), therefore, I feel no guilt allowing those advertisers to stay. Are you suggesting that I shouldn't allow those advertisements or just pointing out the coincidence?
- Will Van Hartog says:March 19, 2013 at 8:41 AM
I think you make a valid point about living below your means! It makes sense
- Kraig @ Young Cheap Living says:April 8, 2013 at 8:49 AM
Will, Thanks for stopping by and for offering your thoughts.
- March 21, 2013 at 12:46 PM
I tend to agree on the house, there's no rush to take on that amount of debt. At least not from me. However, if you happen to work for an employer that matches your 401k contribution I think you'll come out ahead contributing enough to get the full match. If they match 100% for 4%, even taking the 10% early withdrawal penalty you still would have turned 4% into 7.2%. I hate the blanket advice that is given because everyone's situation is different and requires a different route to get to the end result. But too many people don't learn even the basics of personal finance that if they just follow the standards then at least they're making progress. But you're right about the spending, if you want to make a real change in your finances, start with the expenses.
- Kraig @ Young Cheap Living says:April 8, 2013 at 8:51 AM
JC, Your point on taking the match even if I get penalized is one I've pondered. I would definitely do it if I didn't have to pony up the extra cash myself. But since I have to direct some of my savings over there to get the match, I'm not sure I want to do it. It's all about the loss of freedom for me. But you do make a good point and I'm going to do some more research and run some more numbers to see if I'm doing the right thing. Thanks for sharing your thoughts.
- Adam says:March 24, 2013 at 10:49 AM
Thanks for this great post Kraig. I was thinking to myself the other day "I know I want to retire early, but if I keep slugging all my money away into these accounts until I'm 59+, how do I bridge that gap between my desired retirement age and that date and I think this addresses exactly that.
- Financial Samurai says:March 27, 2013 at 9:30 PM
I've gotta say that I'm very sold on retirement accounts and real estate. I remember waking up one day after 10 years of maxing out my 401k and realizing, holy CRAP, there's $300,000 in it! I'm not going to touch it until 60, but it's just nice to know it's there. Real estate has really built up a good amount of cash flow as well for me. It's important to own real assets in an inflationary environment.
- Kraig @ Young Cheap Living says:March 27, 2013 at 9:32 PM
Hey Sam, I'm not dissing real estate as an investment at all. I'm only questioning it if it's bought to put a roof over your own head. Then it's an expense instead of an investment. I love the idea of buying real estate for rental purposes.
- Financial Samurai says:March 27, 2013 at 9:32 PM
BTW, I wrote a post called, "What Does Early Retirement Feel Like? The Pros And Cons Of Not Working For A Living". I know most readers don't classify me as an early retirement blogger, but as someone who is on the quest yourself, let me know what you think! Best, Sam
- Kraig @ Young Cheap Living says:March 27, 2013 at 9:36 PM
Sam, I'll take a look. Whether or not you blog about early retirement is not important. What's important is that you did it and from what I know of your story, you made it happen.
- Kasey says:April 5, 2013 at 8:11 AM
Kraig, TOTALLY agree with you on the housing front. When I was 23 I was HARASSED by my family about purchasing a house. "Why are you throwing good money out for bad?" "The interest rates will never be this low again!" "You can definitely afford a house with what you make." ON AND ON. So, stupid and naive, we bought a house. A "smart" house. An affordable $100,000 house. A house that was LESS than rent per month. A house with a 4.25% interest rate. Guess what? We have thrown at least $10,000 into our house in the last 2 1/2 years NOT including the $7,000 we put down to buy it. It has ONE bathroom and no basement. The interest rate that would never be lower went lower. The housing prices that would never drop are STILL dropping. And we are not able to take jobs elsewhere because we cannot afford to take the hit it would cost us to sell this property at this point. Dude, if you ever need someone to back up future posts on why to NOT buy a house, send me an email. I've got plenty of reasons.
- Kraig @ Young Cheap Living says:April 8, 2013 at 8:45 AM
Kasey, Thanks so much for sharing your story and reiterating my point on why buying a house isn't always an automatic way to build wealth. It's unfortunate that so many people who have already bought homes get defensive right away when someone suggests it isn't always a good move. I'd love to hear more about your story. It may be a great fit for a guest post here. I'll be in touch.
- KP says:April 7, 2013 at 10:12 PM
Kraig, Interesting article to say the least. Your opinion absolutely puts some financial wisdom on it's head. There are some points you make that I agree with completely. Spending less than you earn is the "Golden Rule" here, and without having spent much time (yet) on your blog, it seems that you are quite passionate about living by it! But, I do have a few questions/ concerns. Some of the bullet points you mention at the beginning of this post are essentially the "How to not go broke" strategies, as I would call them. They're also the low hanging fruit for people to either get out of debt or get back on solid ground. Set up a high interest savings account. Why earn .01% when you could be getting 1%? Keep extra cash in your savings as opposed to your checking to earn that 1%. Set up retirement accounts to plan for the future - get the 401k match and open a roth. Will these things alone allow you to retire? No. Are they productive steps to do so? I think that they are and I think that they are personal finance TIPS, because although they SEEM straightforward, a LOT of people do not think about saving! Looking at several sources [http://research.stlouisfed.org/fred2/series/PSAVERT/ and http://ycharts.com/indicators/personal_saving_rate] show the US Savings rate at 2.6% in Feb 2014. I think that that fact alone shows that people DO in fact need those tips. I, myself, was once a man in the dark about my finances not too long ago, and after continually reading some of the tips you mention on numerous blogs they finally got through my thick skull to kick my finances into (somewhat) high gear. But before I get too off topic, I think that my main argument FOR setting up these retirement accounts that you have sworn off is - "What do you have that's better?" Everyone and their cousin has quoted that these retirement accounts, allocated into mutual funds kick back a 7% return on your investment (over the long term (ie those 30+ years until 59 1/2)) Are you suggesting that it would be best to keep our "retirement savings" in our high yield interest saving account earning that 1% which was scoffed at earlier? As you have quoted MMM in the post, I'm sure you're a fan (as am I). But the main thing that I've taken from his words of wisdom is that your money can work harder than you ever could [http://www.mrmoneymustache.com/2012/01/30/your-money-can-work-harder-than-you-can/]. I understand your distaste with the rules and regulations with how old you must be to withdraw your money - especially as someone who wishes to retire 15+ years before the "government allocated age". However, I would think that it would be more of an incentive to contribute to those funds. As Financial Samuri brought up, you contribute to the retirement account for however many years and then wake up one day and, "Holy shit! Theres $300k in there I forgot about!" Money you didn't factor in to your "number" for retirement and money that you are able to keep there until you wish to tap into it. I apologize if my argument seems fragmented in any way, but my main dispute with the post is that you seem to discount the logic of retirement accounts but don't offer a "better" way to earn 7% on your money in the long haul. What are you doing with your retirement savings instead of investing in retirement accounts (and a house)?
- KP says:April 7, 2013 at 10:14 PM
Damnit, the savings rate at 2.6% is for Feb 2013.
- Kraig @ Young Cheap Living says:April 7, 2013 at 10:23 PM
KP, My alternative is the exact same investment, mutual funds, only I don't use a retirement account for those funds. I can invest in mutual funds either way, inside of a retirement account or outside of one. Those investments can earn the same return (7% in your example). The difference in this: In retirement accounts, they grow tax free. BUT, and this is a big but, you can't take out that growth until you are 59.5 years old. Where as in my strategy, I do not get tax free growth, meaning I will have to pay taxes on my investment growth, but I am free to access the money and spend it as I see fit, whenever I want. Again, a savings account is not what I'm taking about using here. I'm planning to invest in the stock market, but just doing it outside of a retirement account. A retirement account is just a set of rules that applies to an investment account. It just says you get a tax break of you agree to not use the money until it are old. Well, I don't agree to that.
- mae anderson says:April 24, 2013 at 10:02 PM
I agree with what you’ve said that we should live below our means. It is really a must that we avoid spending more than what we have. But I don’t totally agree with the idea of not opening a retirement plan. It seems an unwise decision to not open one.
- Jim says:September 3, 2013 at 7:13 PM
Hi Kraig, I've enjoyed listening to your podcast lately. I received the advice in my 20's: "buy as much house as you can as soon as you can". This seemed to work great for me at first - I bought a $100k townhome and sold it for $244k only 8 years later. I rolled these winnings into a new $530k McMansion in 2006 and gave it all back when I sold it 6 years later. But forget what I paid vs sold for - the cost to keep up a home like that will just prevent you from keeping to your budget and living within your means. I now rent a more modest house and amy wife and I are saving 40% of what we make. I also have a disdain for the stock market. The way it tanked in '08 - I just don't trust it. To me the big fear is run-away inflation. I think it will come as the government has printed so much money. You need some hard assets like gold IMO. Keep up the good work - this is a good message - get by on less before it is too late.
- Kraig @ Young Cheap Living says:September 3, 2013 at 7:17 PM
Hi Jim, Thanks for the feedback and for sharing your story. Your story sounds like a lesson that we can all learn from. Sometimes it's great, but sometimes, it's terrible. All in all, the point I take from your story is that of the upkeep costs associated with a fancy house. That's where it'll get you, as you mentioned. The stock market is scary so I can see your point there. Runaway inflation? We'll have to wait and see I suppose. Thanks again and take care!
- Sarah says:September 9, 2013 at 1:34 PM
It sounds like the issue you have with conventional financial advice is that it doesn't value complete freedom and flexibility. I also think you're a bit short-sighted with your thinking, but I'll address that point in a bit. In general, personal finance experts want to help you get the most value for the least amount of effort (in other words, the biggest bang for your buck). Contributing to a 401k/IRA and buying a house within your means can absolutely provide that. Freedom is harder to quantify. However, if you want to be able to access all of your money whenever you want, it comes at a price. Not an immediate one - but you'll lose out on opportunities like earning an employer match in your 401k, taking advantage of substantial tax deductions, and being completely free of mortgage/rent payments by the time you retire. (Wouldn't that be nice?) Do traditional investments work for everyone? No. Will they support your ideal lifestyle? Maybe not. For me, though, sacrificing a bit of flexibility in the short-term is absolutely worth the long-term advantages.
- Kraig @ Young Cheap Living says:September 9, 2013 at 1:38 PM
Sarah, Thanks for the feedback. You're right, my ways of thinking won't work for everyone. Like you said, there is a price that I need to be willing to pay to gain the freedom and flexibility I'm desiring. And yes, I am aware of it and happy to pay that price. Thanks for sharing your thoughts. I'm glad to hear that you're making conscious decisions to ensure the best outcome for you according to your desired life goals. Take care,
- theFIREstarter says:February 4, 2014 at 4:02 AM
Late to the party but I have been thinking about this a lot recently and I have to say I do agree with some of your logic. Obviously it is down to the individual situation, and especially depends on your age, and how far away you are from your "freedom". I am going to pump a bit of money into tax advantaged accounts as I am 32 and we can access them at 55 over here in the UK, and take a 25% lump sum at that age as well, tax free. The tax advantages while saving and taking back out really are quite huge so it would be silly to ignore it entirely. But mainly I will be investing in property or stocks over the next five years, and then maybe reassess as I get older and near the minimum age. With the house thing, again I think it's 50/50. If you live in an area where buying makes sense financially, then buy, if not then rent. Just do the numbers and see what works out best. So again, I agree with your basic premise that buying a house is not always the best thing to do! Cheers!
