You Should Love Mopping Floors

Over on FreeMoneyFinance they wrote recently “Do What You Love” Is Bad Advice and in the comments someone quoted this :


"Your work is not supposed to make you feel amazing and wonderful all the time. It’s work."

Exactly.  It's work.   Its called work because its work.  Its not called "happy fun time".



I don't really understand why this expectation that we should love our work started and why so many people buy into it.

I mean what if I started preaching to everyone that you ought to love mopping the floors?   If you don't love mopping your floor then you must be doing it wrong.   Keep changing how you do it until you love it.  If you don't love it then you're the problem.   Is the floor too big?  Well maybe you should downsize your home.   Buy different mops.  Get one of those robot floor things.   I LOOOVE mopping my floors and you should too.   You don't like mopping?   Its you... you're broken.   The only true way to live your life is through loving mopping.

See how silly that sounds? 

Yet so many people want to accept the idea that we should love our jobs.  Why should I be expected to love work any more than I love household chores?

Right about now theres someone out there thinking how they actually DO love household chores.  That person will comment how they love mopping.   This just adds to the silly argument.  Of course some people love mopping floors and some people love their jobs.   But you people are in the minority and that doesn't mean the rest of us are supposed to change our lives to match you.  But those people will be held up as the example.  See?  If Bob loves mopping floors then it can be done.  Look at how happy Bob is.  Why are you so miserable?   You must be doing it wrong.  Have you tried a different brand of cleaner?

We mop the floors because its necessary.   We don't have to love doing it, but we do have to do it. Jobs are similar.   People work at a job because its necessary to earn a living.   You don't all have to love your job but you do have to make a living somehow.



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STILL House Shopping 18 months later

My wife and I started house shopping in Sept 2010.  We were still shopping in March 2011.  Our home search continued in Sept. 2011.   We're still looking after about 18 months. 

The market was fairly slow over the winter months and the house shopping slowed down since nothing much appealing came up for sale.   There were a few houses that came by that were interesting but not a lot.    In the past month or so the market has really started to get more active and we're seeing several homes put up for sale each week. 


One failed offer

After many months of searching we actually finally made an offer on one house only to end up being outbid by a competting offer.   That experience was a little frustrating.  We actually looked at the house then didn't make an offer fast enough before someone else made an offer and a sale went pending.   Losing it disappointed us, but then a few days later that deal fell through and we were able to put in our offer.   But the day after our offer the original deal was back on and we lost out.   It was a nice house in a great neighborhood.   The price was around $450,000 and I don't recall exactly how much we offered.   Since it was priced pretty low, I don't think we offered much lower than asking.

Loan pre-approval


This week we finally gathered up all the documentation required to get a pre-approval on a loan.   I submitted the documents to our mortgage broker earlier this week and I'm waiting on the results.  We have had a pre-qualification for a long time but thats not the same as a real pre-approval.   The pre-qualification is more of a 'rough estimate' on our qualifications.   At least thats my view of it.   The pre-approval however is an actual approved mortgage amount.    We wanted to get pre-approved for a couple good reasons.   First it will help us make a quicker purchase.    Second, having the pre-approval already done will also tell us how much of a mortgage we can actually qualify for.     The broker indicated we'd qualify for a loan much larger than we really want, so I don't expect a problem.  

More cash, cheaper houses, lower interest rates

The whole time we've been looking our cash balance has gradually grown.   At the same time the prices of homes have gone up and down a little bit.   Today interest rates are at 30 year lows at around 3.7% level.   Combined these trends have made a house more affordable as far as impact to our bank balance and in terms of the monthly mortgage payment.

Here's the trend in finances over the period we've been looking :

	Feb-11	Mar-11	May-12
Cash on hand	$120,000	$150,000	$175,000
Cost/ sq ft	$164	$166	$161
Cost for 2500 sq ft	$410,000	$415,000	$402,500
Mortgage rates	5.10%	4.00%	3.75%
Down payment	$82,000	$83,000	$80,500
Mortgage payment	$1,780	$1,585	$1,514
Cash left	$38,000	$67,000	$94,500

The cost / sq. ft. figure quoted above is the median for the ZIP code we're looking in.   The actual homes we've looked at vary quite a bit.   In the past coule weeks we've seen homes that would come in at $148 / sqft versus $193/ sqft.    The first was a foreclosure that needed some work and the other was a pretty nicely updated home in a nice neighborhood that was probably over priced.

Looking for 2700 sq ft up to $500,000

Right now we've mostly settled on a home of around 2700 sq. ft. in size.   It seems that what we want in a home fits at that size roughly.     We've also gradually increased the price of homes we've looked at up to the $500,000 level.   As we looked at more and more homes and failed to find what we want, we gradually looked upwards in price.   This is of course not a great trend, I'd of course much prefer that we could find a home we want for dirt cheap.   But we're found that the kind of homes we want are closer to $450,000 to $500,000 range.    The lower interest rates and more cash in our bank account has made it feasible for us to consider spending a bit more.


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Taxes in Retirement

One major aspect of retirement planning is the tax bill you'll face in retirement.   Figuring your future tax bill has a couple major implications.  First the tax expense itself is a major line item in your budget and you should plan appropriately.   You don't want to figure out a post-retirement budget and totally neglect or severely misjudge your tax obligations.   Also the taxes you pay in retirement will help determine if a pre-tax retirement fund or post-tax retirement fund is appropriate. 


Most people face lower tax bills in retirement.    Income is lower and senior citizens get some special tax breaks.   There is a common fear today that taxes will inevitably go up in the future.  This may be true to some extent but taxes are quite variable based on income level and its unlikely taxes will go significantly for low/middle income earners.  Overall though the tax breaks and lower income of retirees should generally outweigh future tax hikes. 

There is a general exception to this.  If you are in the top tax bracket during your earning years and you also expect to be in the top tax bracket in retirement then you may see higher tax rates post-retirement.  But that situation likely only applies to the top 1% of income earners in the population and for the other 99% of us we're much more likely to see lower tax rates post retirement.



Taxes post-retirement come in several forms.   WE pay taxes to the federal government, usually states have income taxes and property owners have property tax bills.  Lets look at each of these and discuss how your tax rates could change after retirement.


Federal Taxes

For example sake lets say you currently make $100k in wage income today.   You are in the middle of the 25% tax bracket.  You also normally pay 7.65% into social security and medicare.   Thats a combined marginal tax rate of almost 33% and an effective tax bill of approximately 20% or $20k.  When you retire you stop paying SS/med so thats a 7.65% tax cut effectively.  But of course you don't still have that $100k income and you probably have more like $80k right?   Since you were making $100k you have a good SS benefit and $25k of your income is SS.  Only 85% of your SS is taxable so thats more like $76k taxable income.   That $76k taxable income would put you in the 15% margin bracket in todays rates and give you about 10% effective tax rate or $7600.

So if nothing changes in the tax laws and your income pre-retirement is $100k and $80k post retirement your tax bill will drop by approximately $12,400.   The effective tax rate will go from 20% to 10% and your total marginal bracket including FICA will drop from 33% to 15%.

Do you think that marginal taxes rates are going to go from 15% to 33% for retired people making $80k??   Do you think politicians are going to double the effective tax rates for a married retired couple from 10% to 20%? 

I sure don't.  That's kinda silly.  For anyone who thinks this is feasible or likely within the next decade or two then I'd challenge anyone to find two politicians in our federal government who want to raise taxes on ANYONE by 18% marginal.

You may have notice I put a qualifier of 'within the next decade or two' in that last sentence.   I would admit that 40 or 60 years from now things could radically change in our government.   It was only 50 years ago in the 1970's when top marginal tax rates were 70% and now the top rate is currently half that at 35%.    You really can't plan for 50 year time periods.   50 years from now the  Martians may have taken over after we blow ourselves up with a nuclear war with India after the solar flares knock out all the electric grids and the zombie apocalypse... oh.. sorry.. what were we talking about?  Oh Yes, taxes in the distant future are anyones guess and not something you can predict nor plan for.   If you'd have told your grandparents 50 years ago that taxes would be cut in half by now they'd have probably scoffed at the idea, yet it happened.    Nobody can predict government policy 50 years into the future and anyone trying to do so is just taking blind stabs in the dark.


State Income Taxes

The majority of states do not tax social security.   That is probably the biggest reduction in  state taxes for retirees.   States also usually have some sort of income tax cut for senior citizens.   Usually there is a larger exemption of some sort.  So often your tax bill is a little lower simply due to the age based benefit.   Many states do not tax pensions in general  : Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York, and Pennsylvania.   Few people have pensions nowadays but for those who do this can be a considerable benefit in some states.

Between the various tax benefits for senior citizens in the various state income tax systems, most retirees will see sizable drops in their state income tax bills post retirement.  But this is quite dependent on the state and your financial specifics.   I won't make any broad generalizations about the future of state taxes since we've got 50 different states with varied fiances and political climates.

Lets look at an example.   Say you live in California with its relatively high state taxes.   Pre retirement you have an income of $100,000 and your CA tax bill is around $3700.    Post retirement your income is down to $80,000 total but they don't tax the $25,000 from social security so your taxable income is just $55,000.  Also CA has an extra tax credit for senior citizens.   As a retired couple with $80,000 income your CA state income tax is down to just $652.    Thats about a $3000 tax cut in your state taxes after retirement.  

Of course every state is different and state income taxes treat retirees differently.  In some states you may not see a significant change in your state tax bill and in other states your taxes may be dropped to zero.  The future could hold anything here as well.


Property Taxes

This one varies from state to state generally and may also vary between cities or counties within each state.   So there are likely 1000's of different systems for property taxes across the nation.   However many states and local governments offer deferrals, discounts or exemptions on property taxes for senior citizens.   Usually such programs have an income limit but many seniors can qualify.  

Going back to the California example.  Say you live in San Mateo county.    There is a program in CA which gives property tax assistance for seniors and disabled individuals but they limit it to people with incomes under $40,000.    In our example the post retirement income is $80,000 total so that would be too high to qualify for the property tax assistance.

Other taxes

Most of the other taxes we pay are consumption taxes based on a % of purchases.   General sales and excise taxes fall into this category.   I don't know of any special sales tax rates for retirees so I don't expect thats common at all but feasibly I guess it could exist somewhere.   For the most part though I think sales or excise taxes are pretty predictable as a % of your spending and likely won't vary post -retirement other than any changes in spending amounts.   

Estate taxes are another major category of taxation that some retirees do need to be aware of.   Estate taxes however only come into play if you're a millionaire.  If you are a millionaire and likely subject to estate tax then I'd recommend working with an estate planner.



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Whats a Jumbo Loan? Why should you care?

My wife and I have been gradually home shopping.   We're in no rush to buy but still looking since prices are good and interest rates are very low.   I was talking to our mortgage guy and he pointed out that the maximum loan before you get to the "jumbo" loan is $417,000.   (The limit is higher $625,500 in Alaska, Hawaii, Guam & U.S. Virgin Islands).


Whats a Jumbo loan?

Simply put a jumbo loan is a loan that is larger than the government sponsored FannieMae or Freddie Mac will purchase.   Normally Freddie / Fannie will buy loans from banks.   To sell a loan to them the bank needs to ensure the loan conforms to standards.  Such a loan is a 'conforming' loan.   But Freddie/ Fannie won't buy very large loans and the limit is the threshold between a conforming loan and a Jumbo loan.   Jumbo loans are the term for loans larger than the amount Freddie/Fannie will buy.

Why do you care? 

Jumbo loans are a bit riskier and harder to resell for the banks.    Therefore they charge higher interest for a jumbo loan. 

How much more do they cost?

The spread between a conforming loan and a jumbo loan is generally between 0.25% and 1%. 

Lets look at an example :  I compared the rates for a $416,000 conforming loan and a $418,000 jumbo loan on Amerisave.   The conforming loan could be had for a 3.625% rate with $404 in points/fees and the jumbo loan was 4.375% with $108 point/fees.   Thats a 0.75% spread.  The payments were $1897 and $2087 for the conventional and jumbo respectively.     Thats a difference of $190 per month at todays low rates.   Thats a pretty big deal.

If you can help it you should avoid jumbo loans.   

Of course you don't want to pay an extra 0.25-1% on your mortgage if you can help it.  So you should do what you can to stay within the conventional mortgage guidelines and avoid jumbo rates.
One tactic is to bring more money towards the downpayment to avoid the higher interest costs.   For my example above the loans are on the threshold and the $418,000 loan would cost you $190 less per month if you brought $2000 more to closing to instead borrow just $416,000.   Of course few people are borrowing just at the verge of Jumbo rates and its harder to bring $100,000 extra to the table if you want to borrow $515,000.   Another way to try and avoid a jumbo rate is to get a secondary mortgage on top of your primary.   So if the house costs $600k and you have $120k for a downpayment thats still a $480k loan which is in the jumbo range.  If you get a $400k primary loan and a $80k secondary loan then your primary would be a conventional rate loan.    Such second mortgages can be harder to qualify nowadays.




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