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October 14, 2006


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There's a discrepency in the top portion of the article. Is the multiplier to be used for annual income or annual spending? The article seems to flip between the two, as if they the same.

Agree with paying off the debt...Freedom is measured in many ways and debt free is a great place to be. I am almost debt free and find I can save more money without a mortgage payment. At some point, the tax savings for me were not substantial as the longer towards an ammoritization schedule end date, the less tax savings as the interest is much less than the principle. Also, not having debt allows me to over-save on a weekly basis and drive into investments. I am still not buying into the debt culture and while some debt is required as a mortgage, not having one allows me many other options in my life.

Remember, good debt is debt that earns more than it costs. A 6% mortgage after taxes and inflation would be something like 1-2%, 3% tops, real. You can't earn a real return more than that investing? Shame on you. The point is not to pay it off, but to be able to pay it off whenever you need to and investing should allow that. No where else will you ever be able to invest so cheaply.

This is the best of the net worth Vs age formulas I've seen, assuming it really is based on spending and not income which is not entirely clear from the description. Also is more reasonable in that a 20-year-old is not expected to have one or two year's income saved up instantly as some of these type of formulas suggest.

I agree with the recommendation that personal property should not be included in calculating net worth. How much could I really get at a garage sale? For my house, I value it at 75% of the tax appraisal, to account for any overvaluing and the costs of selling the property.

I doubt that many people try to factor in the taxes that could reduce the proceeds from a tax-deferred acount like a 401K. I expect the vast majority just plug in the 401K balance and regard the entire amount as an asset. That would be reasonable if you're at retirement and only have $40K in tax-deferred savings -- spread out over several years the annual withdrawals could be less than your personal exemptions and standard deduction ($8450 for a single person). But at some point past that, withdrawing $1 of tax-deferred savings can cause $.50 or $85 of social security to be taxed, effectively increasing your marginal tax rate. Conceivably you could pay a much higher tax rate in the future than what you're deferring this year. And if I really tried to liquidate now I'd have to pay a 10% penalty plus being put into a high tax rate.

Personally, I devalue my tax-deferred savings balances by my current marginal tax rate when I calculate my net worth, which I also do monthly. I can do this since I use a spreadsheet I've set up instead of Quicken, Money, or similar program. Even after this adjustment, my net worth is 13 x spending putting me about 10 years ahead of the point I should be.

I also chose to pay off my mortgage early, reducing 30-year notes down to around 15 years. Perhaps I could have made more by investing the extra payments, but it's nice having to only write 2 checks per year instead of 12. (Still have to pay the taxes and insurance. Well, perhaps not the insurace.) The money I had been sending on my mortgage principal and interest now goes into retirement savings.

I'm not following the logic that having an extra 1/2 a year's spending saved up would allow you to retire an entire year earlier. Particularly since in the age range where most people retire you're expected to accumulate an additional 0.6 -0.7 year's spending each year. Once retired, you stop accumulating and start drawing down, and even with some appreciation your spending is likely to exceed that.

I'm in the "keep the mortgage and invest savings" camp. Our taxable investments have grown at about 10-12%/year, which is far more than our mortgage's interest rate, so we're happy with our financial arrangements.

That said, we're happy that we crossed the threshold where we could pay off our mortgage with post-tax money a few years ago, so it's a "money management" decision for us to keep it.

As for the rest of the article, it's very good, although, like many retirement discussions, it's waffly on "take home pay" versus "living expenses" (or "standard of living"). I do wish writers of these types of articles would be as careful with definitions as they are with numbers. I think part of the reason they get away with this imprecision is many people _only_ save for their retirements by using 401Ks and IRAs, and don't have much in the way of taxable savings.

I like that formula a lot- unlike the other one you've mentioned (from Millionaire Next Door?) it works even if you're fairly young. At ages below 25, the number is negative, though- so by that standard, having a positive net worth, I'm doing pretty well!

I've witnessed plenty of people who don't pay down the mortgage and invest the difference, but for the vast majority of homeowners the mortgage serves as a forced savings plan. A healthy financial statement in my opinion often includes a mortgage along with liquid assets equal to or greater than the mortgage balance. That said, I can understand the added sense of security in paying down the home loan.

As for frequency to compute net worth, between the ages of 18-35 I would do so monthly. From 35-50 I would do it quarterly and from then onward maybe twice a year or yearly. After a certain point the measurement reflects volatility more than performance and requires a wider window of observation.

One other thing I would point out is that although 15% savings should be enough, it never is. There are too many problems that occur during life, accident, illness, divorce, unemployment. These can prevent reaching your goal saving only 15%.

'If you are aggressively trying to pay off your mortgage instead of aggressively trying to save and invest, your efforts are laudable, but mistaken. The quickest path to wealth includes having a home mortgage that could be paid off, but choosing not to in order to take advantage of the tax benefits. The rich wisely leverage and invest.'

I can tell this was written before 2008.

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