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Tuesday, November 27, 2007

JO Review: Tuition vs. Retirement

Please read the previous questions asked at the Agudah convention regarding tuition and answered by Rabbi Shmuel Feurst, if you have not previously read them (Tuition vs. Camp, Tuition vs. Vacation, Tuition vs. Kollel).

Question--What comes first, tuition or retirement funds?

Answer-Obviously, tuition comes first [emphasis added]. While everyone would like to have a retirement fund, accountability for one's children comes first.


Unfortunately, and with all due respect, what is obvious to the Rabbi is not so obvious to me. The Rabbi seems to be of the belief that retirement accounts (401(k)s, IRAs, Roths, etc) are luxuries. I am of the belief that a minimally and/or modestly funded retirement account is not just something nice, but is something necessary and goes hand in hand with being "accountable to one's children."

I think we can all agree that people get old (it happens!), older people can no longer work the same hours as young people, and medical expenses tend to increase in old age. People still need to eat, utility bills still need paid, taxes still need to be paid, etc. If a person has not saved up, guess who will be picking up the tab? Most likely a combination of their children, the community, and the government. Since I tend to view all of the needs to the Jewish community as interconnected, I view the lack of saving (combined with spending and debt financing) as something we all will pick up the tab for eventually.

So here is the deal. A person that starts funding their retirement account at age 25 will only have to put away a small amount of money (say $2000 a year, or $167 a month) to reach a reasonable goal upon retirement. Whereas, a person who decides to forgo funding their retirement account until age 45 will have to put away at least six times more (read: no less than $12,000 a year) to reach the same goal. Wait even longer, and that amount could be twenty fold.

On top of all of that, the matching funds that your company might have provided you are gone forever. Even if you don't fund a certain amount during one pay period, you are out that money forever. Every company has a different vesting and matching policy (5%, 3% up to 6%, etc). But no matter the policy, last I checked a 50% return or even a 100% return is phenomenal. And those matching funds make it easier to reach a reasonable goal.

Now, I'm not sure that if I sat on a tuition committee, that I would be so keen about hearing a family's plans about not paying tuition in lieu of funding their retirement account because the schools needs the money now. Nor would I be too thrilled about hearing their plans about taking a discount so their children can go to camp (which was recommended). And, I'm sure I would not want to hear about how they lack cash flow after "juggl[ing] funds" (i.e. borrow and borrow some more) to pay for weddings and "support" and how they now need a deep reduction because the bank is eating them alive yet they still have kids they need to put through school.

So, what to do? I don't know. Ultimately, if I could force young people to start to put as much as they can into their retirement accounts starting as soon as possible, I would. Because chances are the schools aren't going to make room so they can put $2000 away for retirement even if they make room so they can send their kids to camp.

Up Next: More on Retirement

87 comments:

jewchick said...

I've been awaiting this post...

And, as a young frum Jew who is saving for retirement, I think that it's a big problem that young frum Jews are not saving for retirement. Or buying life insurance. Or disability insurance. Or writing wills. Is it just me, or do we as a people have a problem with looking towards the future?

I look forward to the next retirement post.

Anonymous said...

Thank you for raising this topic. It really cuts to the core for me.

As I read this post, I began to wonder what Rabbi Feurst thinks a retirement account is for. Perhaps he has the impression that retired people draw their support from pensions and social security and then use their retirement accounts to fund various perks and luxuries such as travel. But that is not the reality for many people today, myself included.

I and millions of others are funding retirement accounts with the expectation that this money will be used to pay for our basic needs when we are no longer able to work as we do today. By basic needs I mean food, clothing, shelter and medical care.

School boards and rabbis need to understand that the conventions of retirement have changed radically over the past 20-30 years. Pensions and social security are no longer "givens". Both the private sector and the government have made it abundantly clear that they are not very willing or able to support people in their old age.

So, many of us are on our own as far as retirement is concerned. The ONLY thing we can count on is our own retirement savings.

If we do not fund these retirement accounts during the years when our children are in school, we will be facing a very predictable and very dire financial crisis a few decades down the line.

With the government and the private sector distancing themselves as much as possible from financial support of elders, we may hope that our children will come through for us in a crisis. But these are the same [adult] children who are not making it financially today and who require support from their parents to make ends meet (as has been discussed on this blog). So even if the children are willing to provide financial support -- are they able to?

I wish I had solutions, not just dire warnings. I am thankful to SephardiLady for establishing this blog so there can be an exchange of ideas on these issues. Sometimes I think we are a community that just cannot live within its means. We want the American Dream and the Jewish Dream and having both of those things together is very expensive indeed.

Tamiri said...

These questions just reiterate the fact that: IT'S NOT FAIR!!!! The whole day school system is biased and not fair, and there are always those getting away with more than others. I was very unhappy with the way things worked, and at the same time felt sorry for those killing themselves to pay full tuition while others were having a blast. I did not see all that many people on assitance who had "no life" so-to-speak. I don't believe you should ruin your life and your future (ie, not saving for retirement) in order to pay tuition. I don't think it's worth it.

Tamiri said...

One more question that has been bugging me: Where does it say in the Torah that you have to send your kids to Jewish Day School if you can't afford it? Is it something like the new tradition that young couples can't get married without have new furnishings, specific jewellery and shaitels? A norm? Does a parent have to kill themselves working in order to pay for the child's education? Are we still surprised at some kids' sense of entitlement? Does a mother have to leave the house to take a job she doesn't like/want in order that he child should be sequestered behind Jewish Day School walls? Should parents relinquish their right to save for old age (and self-respect) because the children "need" to be in a specific misgeret?

Tamiri said...

I can't count, I guess that was more than one question

Anonymous said...

I am under 30 and have, thank g-d, over the last few years, through matching funds, been able to put away enough that I have close to $70,000 fully vested at my company. As is clear to anyone following the news, there is a good chance that social security will not be here in the next few years unless it gets the fix that it needs. People are fooling themselves if they think they should not save for retirement. Many companies match funds, and if you don't take advantage of that you are giving away FREE MONEY. The cost of retirement in 30-40 years from now is going to be in the millions. Based on the current rate of return of about 6% on safe investments on $1MM that is only $60,000. Factor in increased cost of living over 30 years and we are looking at about a need to save about $2MM per family to retire and not have to touch the principal balance- scary stuff.

aryeh-baltimore said...

I agree that saving early for retirement is critical. Classic example is twins--one who saves from 25 to 35, and then stops. The other starts at 35. The one who starts at 35 never catches up to the one who started at 25, despite putting more money in over a longer period of time (I forget the exact numbers).

SephardiLady-I think I feel conflicted on this issue. I agree 100% that everyone needs life insurance, disability insurance, an emergency fund, and a retirement fund. These are all part of my budget. However, I also wonder if I should be essentially paying tuition for folks who have the money, but are just saving it. When you pay for one thing, you're really subsidizing the other.

That being said, I don't think we should penalize folks who save for retirement any more than folks who (A) own a home (B) own a car that costs more than a few thousand dollars (C) own a shaitel (D) own jewelry (E) take any vacations (F) eat meat during the week, (G) put more than a piece of meat in their chulent, etc. That's the crux of the issue. Should people get tuition breaks if they are not down to the bare essentials? In my opinion, my above mentioned list (life and disability insurance, emergency fund, retirement fund) are more important than A-G.

Maybe the solution is more complex than a 1 page income and expense form for financial aid. Maybe they need to see if you have a balanced budget. If you have a proper budget (25% towards your house, 15% towards retirement, etc), then you can get some help if tuiition doesn't fit in to your budget. If you don't have a proper budget (60% towards your house, too much money for groceries, etc), you are referred to a Dave Ramsey financial counselor, and you are told to come back when you finances are balanced.

Then again, our yeshivas are so bad at managing money (since they are run by people who can't manage money in their personal lives), that it's no surprise that they don't expect this of the parents either.

One more question---wonder what the response would have been if he were asked, "Should I stop playing the lottery if I don't pay full tuition?" Since I've become frum, I think I know more people who play the lotto than who save for the future.

Tamiri said...

aryeh wrote "if you have a balanced budget. If you have a proper budget (25% towards your house, 15% towards retirement, etc), then you can get some help if tuiition doesn't fit in to your budget. ". Well, what if houses in the Jewish area eat up MORE than 25% because the prices within the eruv are insane? Should a person NOT "buy" a house (in quotations because essentially the bank owns it, not you) and pay rents that are also out of this world? In our case, the last home we bought cost $252K. A bargain in a good Jewish neighborhood. To rent a house would have been $2500... which should we have chosen? Nothing her is so simple. Even the financial forms are not fool-proof. How many people work for cash under the table, and don't report income? There are no little boxes to tick off for money under the mattress. Yet out it comes when people need a new car, driveway, trip to FL - whatever. There is NO "fair" in this business.

Tamiri said...

anonymous wrote: I am under 30 and have, thank g-d, over the last few years, through matching funds, been able to put away enough that I have close to $70,000 fully vested at my company.. Okay, so you are young and have a ton of money put away for retirement. Have you also been saving for a house? Or, will you need a big mortgage, which will cut into the amount of tuition you can pay (assuming you can't shoulder the whole load). Should that 70K come back to haunt you, or is it nobody's business?

David said...

One example of why this is problematic is that Rabbis themselves are not generally in the whole defined contribution scheme - most of them actually have pensions, or have congregations who buy "retirement houses" or things of that nature. Those are approaches to retirement which are completely gone from the non-Rabbinic world, and I do not believe that the Rabbis understand modern finance.

Consider this: how many rabbis have contracts which guarantee that their children's tuition gets paid, regardless of how much it costs? This is a defined benefit instead of a defined contribution, and it removes a lot of the incentives for the Rabbis to insiste that the schools keep their costs down. To a significant extent, this is part of why the costs keep spiralling up: there are effectively retired pensioners who are supported by current tuition.

Given the impetus on boys to become kollel rabbis, and on girls to marry a guy in kollel, this situation is a growing issue.

This is effectively a pyramid scheme, and we're now at the point in the scheme where the scale breaks it - there aren't enough people bringing outside funds into the system to support an economy of this size.

For the solution, take a look at Tamiri's comments: until we end the concept of entitlement, and break out of the system, we're going to have this problem.

Tamiri said...

david, I don't think all your wrote applies to modern orth day schools. Shoot me if it does, we killed ourselves to pay whatever we paid and I would be SHOCKED if a Rabbi who commanded a hefty 6 figure income PLUS an astounding number of vacation days got significant tuition breaks as well. I am not sure your assumptions are correct. I know the underpaid teachers got breaks, but they deserved them.

aryeh-baltimore said...

Tamiri--regarding your comment on my post, the inflation of houses in frum neighborhoods is not purely a function of supply and demand. It is a function of a there existing a pocket of people with absolutely no financial sense. If the rabbonim were to encourage proper financial peace (the way some Christian ministers now do), we wouldn't get into bidding wars driving house prices up. If the house exceeds 3 times your yearly income, you just cannot afford it, period. It doesn't matter that "that's what housing prices are around there"... you will find yourself in a financial hole eventually. It's 3rd grade math, addition and subtraction. If you subtract more than you add, you end up negative, no matter what the rabbonim say, and what housing prices may be.

Perhaps the solution is mass exodus to less expensive neighborhoods like Baltimore and Cleveland, or rabbonim helping to organize new communities in more rural areas.

Regarding "income under the table", I found it amazing that in NY, all the Jews voted for Democrats who promised to raise taxes and redistribute wealth, and then those same democratic voters worked for money under the table so they didn't have to pay taxes on it.

Back to retirement and anonymous's savings for retirement, it goes back to a proper budget. I didn't go to a yeshiva fundraising dinner recently because it was out of my budget for the month. Did I have the money in savings? Yes, but that's emergency money. Did I have the money in my checking account? Yes, but it's already earmarked (my 401k, my IRA, wife's IRA, childrens' ESA's, childrens' 529s, my emergency fund, groceries, utilities, mortgage, clothing budget, tzedakah/"tithe"). We have extra money normally, but due to an emergency that drained the extra money plus some of my emergency fund, I said I couldn't afford a donation this month, hence no going to the annual dinner.

This goes back to the tuition discussion. Was I lying when I said I couldn't afford it when I had the money? No, I said it wouldn't fit in this month's budget. They offered to let me attend and spread out the payments, but I call that "credit" and "debt", and I refused. They even told me I could go for free, but I refused as I won't take charity. It gets more complex when you're asking for a tuition break (which is essentially charity), so I think it comes back to the question, "Do you act your wage?" If yes, then maybe you need some financial help. If no (for aforementioned lifestyle reasons apart from savings), then you just need budgeting help.

Larry Lennhoff said...

If the house exceeds 3 times your yearly income, you just cannot afford it, period.

Minor point: If the mortgage exceeds, not if the house exceeds. If you've owned homes before you may well have equity that you rolled over from your earlier home purchases.

HAGTBG said...

1. Social Security is not in imminent danger. The major threat is not that social security disappears but that the benefits are reduced and/or postponed. Already the age one can access the full benefits of social security has been pushed back as people live longer.

2. From what I've read, today its recommended that you save $20-$25 for every $1 you plan to spend per year in retirement. So if you want to live on $50,000 a year (at present value and above social security) you need $1 million (present value) saved up at the least. The reason you need so much is that since you might be retired for a long time, you need to have enough money that it at least partially replenishes (especially as inflation will continue even after you retire). $2000 annually at 25, assuming you get an average 6% return is just over $450,000 if you retire at 70. That gets you social security plus $18,000-$22,000. That will hardly be enough if you have any health or other emergencies. Of course you might have a house to liquidate so there's more money there.

3. There are perfectly legal financial structures that your yeshiva is unlikely to ever be able to find so for those so inclined its easy to game the system.

tanwan said...

This is my first posting on this blog so I want to start with "THANK YOU" to sephardilady for creating it.

I, too, have been waiting for this installment. I saw this article in JO when it came out last summer and this particular response to the "should I fund a retirement account" really incensed me when I read it. "No" to funding a retirement account, but "OK" to a couple of weeks in the mountains to destress? Get real.

My husband is in his mid-50's and our kids are all in elementary school. If we don't fund retirement guess who will be collecting on your doorstep in a few years. :-(

I think we all agree on the misplacement of priorities R Fuerst's response to this question expresses.

Something I'd like to mention that I don't recall seeing previously, is the concept of "financial education" something that public schools are stepping up to but I haven't seen yet in at least the frum schools or communities. If anyone needs it, the frummies do!

I used to be VERY naive. I would look around and see people living in regular houses, driving regular cars, wearing nice clothes on Shabbos/Yom Tov, paying tuition, working jobs, etc. and I was under the impression that people who worked regular paying middle class jobs (computer consultants, doctors, etc.) were able to afford their lives. Their non-extravagant, regular lives.

I never did much in the way of budgeting because in a part of my mind I figured the balance sheet would even out in the end.

Again, HOW NAIVE. We were paying full tuition at the beginning, but we are now 10's of thousands of dollars in cc debt as a result of our naivety. (and our medical bills, yikes.) We kept thinking "it will work out. other people are doing it, we will, too" AND naively thought the schools could/would pick up the tab where our home finances left off.

(Please note that we are not talking an extravagant lifestyle, no household help or eating out, for instance, though I work full-time. *But* we do enjoy certain "luxuries" like eating meat during the week. I like to say "frozen pizza" is my household help. :-) )

I think our young boys and girls will be in similar situations when they are making critical decisions in high school about what direction to take in their lives.

Our young boys and girls need a wakeup call, really an EDUCATION, about the realities of "orthonomics" IN HIGH SCHOOL -- *before* they have to make critical life-shaping decisions.

Can you imagine a class where the Rebbe puts up a balance sheet and at the top it says "Typical Kollel Stipend" and then starts subtracting from there? Rent, food, utilities, etc. Hard to imagine, but I think would be a real eye-opener to some of these kids.

Anonymous said...

"Pensions and social security are no longer "givens"."

Even if Social Security would exist as it does now forever, I still wonder: Do families (like the kollel fam with 6 kids below) who don't really earn very much, and certainly don't earn much over the table, expect to collect? Isn't having a low income over your working life a recipe for low social security payements? Of course, the welfare state provides other benefits for such people, But I do wonder if they have done the math and realize that they will not be getting social security in the amounts that their (non-kollel) parents or grandparents may have.... Is there a sizeable generation of kollel families that has reached "retirement" age yet? What do they do?

Btw, as for relying on your children, I'm not sure it's not an ok "business model" to have a lot of kids, support them, and then ask them to support you. Many many people end up dependent on their children. And it used to be considered tit-for-tat for young children's dependence on their parents. And with alot of kids, perhaps you have better odds that one will strike it rich (even if most go into kollel themselves?)...

anon1 said...

Not an easy question, and I appreciate the importance of retirement accounts, but here is the way I see it (from my personal experience): BH, we do not qualify for a scholarship because we are in a position to pay our children's tuition. BH. I put away some for my retirement, but I would really like to put away significantly more (and SL, I bet if you ran the numbers, you'd tell me I'm not putting away enough). So now, why should another family be entitled to scholarship, which will ultimately be a cost borne by the other parents, so they can put into their retirement account? I'd like to do that too. It's not fair either way, so who should bear the burden of that? It is a hard issue, but it's coming out of someone's retirement account.

Ahuva said...

" HAGTBG said...
1. Social Security is not in imminent danger. The major threat is not that social security disappears but that the benefits are reduced and/or postponed. Already the age one can access the full benefits of social security has been pushed back as people live longer."

Social Security no longer pays enough to live off of. I plugged in the numbers for a 30-34 year old female making $50-55k/yr. (http://www.heritage.org/research/features/socialsecurity/

The current Social Security payout would give this woman $1,733/month or just under 21K/yr in retirement. I don't know about you, but I would think that most people would have difficulties living on that yearly income now. I can't even imagine the reduction in buying power of 21K/yr after 30+ years of inflation.

Sure, some form of Social Security might exist in the future, but I have a hard time envisioning it as something to keep the retired person out of poverty. It was meant as a supplement for people who were already getting pensions and was never intended to be someone's sole source of support.

JS said...

Just thought I would post tuition costs for the local Modern Orthodox Yeshiva in my neighborhood. It is the Kushner academy in Livingston, NJ.

Tuition at Kushner (Pre-K through 8th Grade):
Pre-K and Kindergarten: $10,000
Grade 1: $11,000
Grades 2-5: $12,600
Grades 6-8: $13,810

Tuition at Kushner (9th Grade - 12th Grade)
Grades 9-11: $18,450
Grade 12: $18,750

Additional Fees and Costs:
Per child additional costs: $500 registration fee
Per family additional costs: $1000 dinner journal (every year), $2500 building fund (one time only)

My wife and I have discussed having 4 kids. Let's say they're spaced 2 years apart. Let's say the oldest was in 12th grade now. So I'd have one in 12th, one in 10th, one in 8th, one in 6th. My total tuition bill would be $67,820 ($18,750+$18,450+$13,810+$13,810+4*$500+$1,000). Assuming one is in the highest tax bracket and lives in NJ your taxes are 35% federal, Social Security tax is 6.2% (up to $102K), Medicare is 1.45%, State tax is 6.37% (there is a higher bracket, but that's over $500K earnings). So one is paying nearly half their paycheck to Uncle Same. So in pre-tax dollars $67,820 is roughly $135,000.

So someone has to earn at least $135,000 just to pay tuition! I didn't even consider a mortgage and property taxes or other essentials such as food, utilities, clothing, etc. Let alone "extras" such as camp, vacation, and retirement. Living modestly, I think someone would have to have a yearly income of around $250,000 just to pay tuition and not go into debt.

And to top it all off, us having a kid in 12th grade is at a minimum 19-20 years away (we do not yet have children) - so add in around 3% inflatation over 20 years (assuming tuition rises with inflation - ha!) and $18,750 balloons to about $34,000 in today's dollars.

What the hell is going here?!?!?

areh-baltimore said...

JS--cmon... you can use math to prove just about anything! But good point--kind of like Kollel Math. Can somebody tell me the typical kollel stipend.
My Stipend - My Rent - Groceries - Utilities - Health Insurance - Life Insurance - Bi-Annual Vacation to Israel - New Yom Tov Sheitels - New Matching Yom Tov Clothes = (this number better be positive)

As you have observed, you must use your head and do the right thing for your family. First, assess if you want to live in PRNJ. Maybe you'd be better off in a less expensive area. Second, gotta do what it takes to get your income up. Third, have a number of kids you can actually afford to have.

By the way, if you are making $135k, your taxes will be going up soon thanks to the Democratic congress and soon-to-be Democratic president (didn't you know you're rich?).

One other suggestion... though not a clear solution. Start saving $2k/year in an ESA when the kids are born and put it in a growth stock mutual fund. That can help pay for high school, assuming you can bankroll the younger grades. This is also a risk with the Democrats in power, because the use of Coverdells for private high schools ends in 2010, and with the Democrats beholden to Teacher's Unions and against the children, you can bet it's likely that won't be renewed.

Or... you can have the brightest, most well behaved and well-adjusted frum kids possible... and save your money by homeschooling...

js said...

btw, I know my tax calculation is not 100% accurate and things are bracketed which reduces the actual amount paid - but the end result is roughly the same, you are paying roughly half your paycheck to taxes.

Ahuva said...

I find it hard to believe that any family is paying roughly half their paycheck to taxes. You get a deduction per child, another deduction for your mortgage, etc. Money you put into a 401K and health flex spending account all lower your taxable income. Charitable contributions are also pre-tax.

I think I paid something like 16-18% taxes last year as a single and I didn't do anything legally questionable-- it was straight TurboTax.

The situation is scary enough without exaggerating it, folks. :)

Ahavah B. said...

"Based on the current rate of return of about 6% on safe investments..."

There is NO SUCH THING as a "safe" investment. Playing the stock market is, in fact, gambling. You can and very well may lose every penny. Your pension and 401-k funds are "invested" in the same flaky derivatives and REITS that are causing banks to have to write down millions of dollars of their net worth right now.

Charlie Hall said...

"10's of thousands of dollars in cc debt"

You should check this out:

http://www.debtorsanonymous.org

It has helped many in your situation. I personally know many frum people who have benefited.

Somewhat Anonymous said...

2 points on the math here - Unless you are making significatly more than the highest bracket threshhold, your rates will be prety significantly lower. Don't forget that if you are married and filing jointly you effectively get to double the bracket threshholds. Also, State taxes are deductible from Federal taxes (but see the AMT, which would likely hit you at the incomes we are talking about).

Secondly - you should not adjust for inflation when projecting future costs in today's dollars.

Somewhat Anonymous said...

Ahava B. - While it is important to keep the potential risk in mind, proper investing is not gambling is there is actually such a thing as a completely safe investment (FDIC insured high yield saving account or CD, US government bonds, etc.).

Also, I don't think 401K's generally invest in derivatives (although they certainly invest in I-banks which are directly affected by that.

See also: Diversification

Mike S. said...

1) While it is fairly easy to end up with a marginal tax rate of 35%, that is not the same as paying 35% on your income--it is the fraction of your last dollar that goes to taxes, not the fraction of your income.

2) If you are required to take an ad in the journal to send your kid to the school, that is not tax deductable.

3)everyone needs to save for retirement. But I am leaving some of my employer's match on the table so I can pay full tuition. How much more do I have to leave so someone else can save?

JS said...

ahuva,

Many of the deductions you suggest involve paying money to reduce taxes. In other words, the interest on my mortgage reduces my tax burden. Or the amount I give to charity reduces my tax burden.

This is true, but it's kind of like borrowing from peter to pay paul. Your taxes are lower, but you're still paying a huge amount out of pocket.

I used the turbotax calculator to quickly run the following numbers:
Income: $200,000
Kids under 17: 4
Real estate taxes: $15,000
Mortage interest+points: $20,000
Charity: $10,000
State taxes: $12,000
401(k)/IRA: $10,000

Federal Taxes Owed: $30,500
State Taxes Owed: $12,000
Social Security Owed: ~$6000
Medicare Owed: ~$900

Total Taxes: ~$49,400

Total Spent to lower tax burden (real estate taxes, mortgage interest+points, chairty, 401(k)/IRA): $55,000

So while half your income isn't lost solely to taxes, it is lost to taxes and expenses to lower your taxes.

I'm not saying you don't get any benefit from a 401(k) or owning a home beyond the tax benefit, obviously you do, I'm just saying that after those expenses and tuition nothing is left really.

Sorry for not being clearer earlier, admittedly I wrote it quickly without thinking.

somewhat anonymous, your point about "today's dollars" is correct. What I meant was what it will cost in the future.

Ahuva said...

JS, you have to spend money to live. I was just pointing out that you can do it in a way that lowers your taxes. Also-- you and I seem to be working with drastically different sets of numbers (of course my salary is also drastically lower than your $200,000). My mortgage, for example, is $1,200/month. A mortgage allows you to lock in your "rent" cost. Had I not done that, I would most likely now be paying considerably more than that amount in rent. It felt like a lot of money when I started 8 years ago, but it's certainly turned out to make sense in the long run. My real estate taxes are also many times less than the figure you're quoting.

A 401k is necessary to a person's future. As I pointed out earlier, social security does not pay enough to feed/clothe/house/provide medical care for people who are dependent on it NOW. I shudder to think of what it'll be like when I retire. The tax benefit is a bonus you can take advantage of.

Charity is also, as I understand it, a non-negotiable expense for most Orthodox Jews who are not living in poverty.

Is a lot left over, probably not. But do you really need a lot left over if you're providing for your present needs and saving for retirement? It's not "borrowing from Peter to pay Paul"-- think of it as investing in yourself. A house and a 401K returns financial dividends and, in the case of a house with a sensible fixed rate mortgage, provides a shelter from rising rental costs. You're not losing anything-- you're paying yourself instead of Uncle Sam. We have to spend money to live-- but the trick is to figure out a way to spend it in the way that benefits you and your family the most.

js said...

ahuva,

I'll tell you the assumptions I used:
$15,000 real estate taxes is typical in the area where I live.

I assumed a $330,000 and 6% interest (you have a $500,000 and put 20% down and have paid off $70,000 for example). The average house price is around that number around me, more before the subprime mess.

By my calculations above the family has about $100,000 left. Tuition was around $67,000. That leaves $33,000. The principle on the mortgage is around $9,000. That leaves around $24,000 for insurance, medical, food, clothing, etc.

I understand we have to spend money to live and I'm not asking people to shed tears for a family making $200,000 and giving charity and funding a 401(k) etc.

I am saying it's crazy that a family like this isn't living the high life, so to speak. And I know the expectations in our community is that such a family is swimming in dough and others would find it odd they aren't sending their kids to sleep away camps and going to Israel at least once a year or driving fancy new cars.

But my point is more for the family living in the same area who wants to send their kids to the same school (or has to because of few other options) and only makes $100,000. The houses cost the same, the taxes are the same. Fine, so they give little to charity and don't fund their retirement - they probably still cannot pay tuition, are probably racking up debt and will have to hope they can work well into retirement years to "catch up" on savings.

js said...

oh, btw, I wasn't suggesting my income is $200,000. I also don't have a house or any of that. I was just trying to prove a point.

DAG said...

in 9 Years and 6 months of marriage, my wife and I have paid $115,000 in rent.

Ahuva said...

JS, you're right. They should be living "the high life" and they're not. But your hypothetical family also isn't keeping an eye out for the bargains out there right now. One of my mother's friends used to live in a home that was worth about $1 million before the sub-prime mess. The house was just foreclosed on and is expected to go for around $500,000 at auction sometime soon.

A $500,000 house in your neighborhood can probably be picked up for a LOT less at a firesale or in an auction. I got my townhouse at a discount because the previous owner was moving out of state and needed to sell quickly. These days, with all the predatory loans going bad, there are a lot of bargains to be had as people try to sell before they lose it all to the bank. You also don't have to have the 20% down if you're a first time home buyer with good credit. A FHA loan only requires 3% down. You also don't have to pay points if you can't afford them (although it will save you money in the long run if you can). If you plan to stay in your home for the long run, get a fixed-rate FHA loan at a monthly payment you can afford and then refinance to get out of PMI once you have gained some equity.


Dag... Wow. Eight years ago, in my neighborhood, townhouses were going for that. I'm so sorry.

SephardiLady said...

Like most of you, I don't have the correct answer as to what we should do regarding retirement and tuition. But I do think we need to start making responsible personal finance a front and center issue before we wake up one day and find out that the foundation is sinking.

Somewhat Anonymous said...

dag - that's not bad, we're at around 81k for the past 5 years. Going up to 22k per year soon and still far better than buying a place.

Renting is much maligned and quite underrated - it can be the sound thing to do financially (depending on all sorts of factors).

Ahuva said...

Somewhat anonymous, I don't understand. Under what circumstances does it ever make sense to rent? (assuming you can get a fixed rate FHA loan) I was always taught that renting is just paying someone else's mortgage. Sure, renting might be able to get you into a bigger place faster, but at the end of 20 years you have nothing except pretty little receipts and rising rent payments.

DAG said...

We've never had the money to buy...I HATE dumping that money down the drain, but have little choice....We pay almost 20K a year now in rent

Anonymous said...

Ahuva -

The short answer is that renting makes more sense when the cost of renting is less than or equal to the sum of (i) the amount of your mortgage INTEREST payments (after adjusting for tax effects), (ii) the amount of your property taxes, (iii) the amount of property taxes (after tax effects), (iv) the amount of PMI (if applicable) and homeowner's insurance, and (v) the incidental costs of homeownership or apartment maintenance payments.

The long answer will follow.

aryeh-baltimore said...

Ahuva--FYI--Dave Ramsey says you can actually get most mortgage companies to waive PMI once you've paid down enough, instead of refinancing. Considering the cost of refinancing, seeing if they'll waive PMI after 2 years may be the best thing to do.

aryeh-baltimore said...

dag--don't worry about it--there is NOTHING wrong with renting. People don't do the math when it comes to buying. First, they over weight their mortgage interest deduction. The whole payment is not deductible, only the interest. Second, married filing jointly gets a $10k standard deduction if you don't itemize. So if you have $15k in mortgage interest, you're really only $5k ahead in deduction, or about $1000 savings on taxings.

The other big thing is that people don't realize that housing will no longer be doubling every year. Historical housing returns are not that good--hardly better than inflation (with exceptions of "hot" areas). I know this flies against conventional wisdom, but consider--people love to brag about how their home they bought 30 years ago, and how much it's appreciated. Now, try seeing what that same money put into the S&P500 30 years ago would be worth today--it's far more. And that doesn't count 30 years of interest payments, as well as maintenance.

Dave Ramsey recommends no more than a 15 year fixed costing 25% of your take-home pay. Renters pay their rent and that's it. Renters don't have to worry about insurance or property tax. Renters don't have to worry about selling when they move (and you can easily lose money on a house). Renters don't have to pay when the furnace dies, a toilet leaks, the roof needs replacing, etc. Owners need to paint every 10 years, resurface their driveway, clean their gutters, rake their leave, mow their lawns, etc. I am a home owner--I'm just saying that if you're fiscally responsible and can find a good place to rent, you can be better off financially renting a place and investing the money you save on repairs.

Lion of Zion said...

DAG:

you're depressing me

and what happened to your blog?

Ahuva said...

aryeh-baltimore, I hadn't considered investing the difference in an index fund. Thanks for the food for thought. :)

Somewhat Anonymous said...

Renting v. Owning - Long Answer:

First of all, from a pure dollars and cents perspective - which of buying or renting is better will depend on the market price for both. In recent years, the price of real estate has skyrocketed, while rents have remained relatively stable. Had the price of renting been high and the price of real estate low, buying would have been more atttractive. The point is that neither option is inherently better than the other, but that it depends on relative cost.

Homeownership has a lot of potential disadvantages as compared to renting -

(i) You are responsible for a number of additional payments, as mentioned above (taxes, insurance, fixing broken things, heat and water (potentially), general upkeep, etc.

(ii) Inflexibility - you need to find a buyer before you can sell or move. If you have a growing family, this factor can be particularly important.

(iii) You are subject to real estate market risk - as we've seen, the real estate market can move down pretty dramatically in a short period of time, which can wipe out your equity, and even leave you owing more than the home is worth (especially if you are putting down a minimal amount).

(iv) Illiquidity - unlike securities, you cannot just cash out of your investment in your home if you feel that the market is headed down. In fact, it can be hardest to sell at times when you most need to, as real estate prices start to decline (as we are starting to see).

(v) Transaction costs - Selling and buying real estate tends to carry a lot of fees and expenses (brokers, appraisals, inspections, mortgage fees, etc.).

By contrast (i) renters (of apartments anyhow) tend to only pay rent and perhaps some utilities, while the landlord is responsible for all other payments and for replacing broken items; (ii) you can walk away at the end of a lease term, or at any time if you find a replacement or sub-tenant or reach an accord with your landlord; (iii) You can take the money that would otherwise sink into principal in your home and invest it in securities, which are (can be) subject to less volatility and historically have a higher return than real estate. Or if you want to invest in Real estate - there are plenty of RIETS you can buy shares in; (iv) you can cash out securities with a quick call to your broker, and you can reinvest just as quickly; and (v)Renting can (and often does not) have minimal broker's fees and a small refundable deposit - much less than a home purchas'es transaction costs.

I think that's enough for this comment - I will show how this worked out in my situation in another comment.

I'd be interested to hear everyone's (SL?) thoughts on this - do I make any sense, am I out to lunch?

Anonymous said...

Dag - for the first 10 years of a mortgage - you are basically pouring money down the drain because it almost all goes to principal as opposed to interest - buying and selling costs are very steep repair and maintenance are expensive as well

Anonymous said...

I meant almost all goes to interest and not principal

DAG said...

Lion, I deleted my blog....a malecontent discovered my identity.

Lion of Zion said...

DAG:

so what if someone discovered your identity. you weren't saying anything crazy. although i guess its all relative.

so start a new one a different name.

but why then are you still commenting under "dag"?

Lion of Zion said...

SOMEWHAT ANON:

"while rents have remained relatively stable."

not in brooklyn (who cares about the rest of the world anyway)

"the landlord is responsible for all other payments and for replacing broken items"

let me introduce you to my landlord (a frum woman by the way)

"You can take the money that would otherwise sink into principal in your home and invest it in securities, which are (can be) subject to less volatility and historically have a higher return than real estate"

i'm not sure about this argument that some ppl have made here that real estate is not a good investment. if you will be sticking around for a bit, it is not bad investment. even if the market goes down, it is cyclical. also, a house is in a sense forced savings for retirement. without that mortgage, many people might not be so careful to put that extra cash they now have away for retirement. or if you have kids, that extra cash not going for a mortgage will now be seized by your kids' yehishivah (i.e., forget any scholarhips with cash in the bank).

also, while the market has dropped in brooklyn, prices are still crazy. unless you bought in the last couple of years, you are still way ahead of the game.

your arguments are all financial, but there are non-financial reasons to have a house. for starters, if you have a big family an apt. might be very tight; no backyard; no driveway (it can take me an hour to find parking some nights); bad neighbors; etc.

Somewhat Anonymous said...

Lion of Zion -

1) Can't speak for Brooklyn. I'm in the FR/FT area.

2) Historic Real Estate returns are not really all that high. Remember to factor in maintenance/upkeep and property tax payments. Stocks don't cost you money to hold them (and may even pay dividends).

3) The forced savings argument is a common one and I guess there is some validity to it (but see HELOCs). In any event I'm not really anti- home ownership, I just don't think that renting is necessarily "throwing away money" or that people should buy a house as soon as possible, which are very much the conventional wisdom.

4) G-d willing, I plan to always pay full tuition for yeshiva. I'm very uncomfortable with the idea of structuring assets to try and minimize tuition obligations - a Yeshiva scholarship is a community subsidy, and only the truly needy should be utilizing it. (I don't think retirement savings should take priority - although I'm more agnostic when it would mean forfeiting an employer match)

4) I agree wholeheartedly that there are very good non-financial reasons to buy a home. These are the reasons that it can make sense to buy a house even though renting can be a better financial deal. I would note that these non-financial advantages are most greatly felt once a family has a moderate number of children (3-5+). Until then, moving a few times from a small starter apartment to successively larger apartments for the first, say, 10 years of married life as one's family grows is probably a much better idea than rushing to buy a house as soon as possible.

Mike S said...

Housing is usually a high leverage investment that is not subject to margin calls. Thus, you don't need to sell because the price drops for a while; you only need to sell when you want or need to move. And if, over the long run, housing grows a little more than inflation, you get a good return on your investment. Let's say you put 20% down, and stay in a place for 10 years, during which there is a 5% growth in housing per year and 3% inflation. That would be a 21% real gain on the total price, which, as others have pointed out is not such a hot return. But wait, you didn't put up the whole price, you only put up 20%. Now you have doubled your investment, which is an excellent return. Even allowing for 7 or 8% transaction costs, you have done well.

You have to take the difference in costs between renting and buying and ask if it is worth paying the extra costs for the investment. I haven't done the calculation in a while, but when I bought 20 years ago buying was cheaper than renting

Tamiri said...

Somewhat anony wrote: 4) G-d willing, I plan to always pay full tuition for yeshiva. I'm very uncomfortable with the idea of structuring assets to try and minimize tuition obligations - a Yeshiva scholarship is a community subsidy, and only the truly needy should be utilizing it. (I don't think retirement savings should take priority - although I'm more agnostic when it would mean
forfeiting an employer match)

It is noble to pay full tuition. It's noble to not to structure your finances to qualify for assistance (gosh, the number of people I have met who piled on "other" debt to lower tuition bills). Good luck, and don't get sick with what you see around you.
Truly needy: That would be anyone with a decent sized family (6?) earning less than 200-250K these days.
Read the post from JS re Kushner. We were there, with three kids in school (grades 12, 7 and 2) on a $135k income. We were quite needy. House mort. was less than 2annual salaries. Car was old. We gardened and cleaned ourselves. I did not work outside the home (in which case we would have had a larger tuition bill and higher expenses, including child care which would have totally cancelled out any earnings of mine). Life was impossible.

When considering rent vs. mortgage: people forget to take into account the INTEREST, which is lost money. If you borrow $200K, you are probably paying back double that, if not more, over 30 years. Please correct me if I am wrong on this. Meaning: your 300K house, which you borrowed 200K to pay for, actually ends up costing you much much more than $300K!!!
When you rent, what you pay is IT, nothing hidden. If you have money in the bank, and can save while renting, then your returns are likely to be far and beyond what you can earn on a house. What a house is worth means absolutely nothing, as long as you are living in it (unless you borrow against it, and how many times can you do that?). When you have money in the bank, you know exactly what you have! You also don't run the risk of an upside-down mortgage, which happened to many people in CA in the 90s and is happening now (see forclosures).

Somewhat Anonymous said...

Tamiri -

I fully agree that one can have a fairly high income, live a modest lifestyle and still face enormous financial pressure. And people in that position should not be disqualified from getting scholarships if they face long term problems due to tuition costs.

But before people receive a scholarship, they should be required to spend down their assets to a large extent, and perhaps even to take on a moderate amount of debt (not CC debt).

Tuition committees should be concerned that high tuition not bankrupt people or throw them deeply into debt - but it is not unreasonable to expect someone to change their lifestyle and live far below the standard of living that their nominal income would indicate before they can receive a community funded scholarship. Although a high nominal income shouldn't stop people who need help from getting it.

I'm not saying that the "system" would work if only these principles were followed - just that these are the standards I think should be applied for scholarships.

Lion of Zion said...

TAMIRI:

"people forget to take into account the INTEREST, which is lost money"

the interest it tax detuctable. i know that means you don't get all of it back, but it's not a total loss.

Lion of Zion said...

TAMIRI:

"But before people receive a scholarship, they should be required to spend down their assets to a large extent"

i agree with you. this is why personally i'm not convinced everyone who complains of a tuition crisis is really suffering from one. but that's for a much logner comment than i have time for now.

i do want to say that while i agree with you now, i don't know how i will feel when i'm paying the full 13k for kidnergarten and still renting because the yeshivah sees i have a cash flow + savings, won't give me a break and so i can't save for a house (which ironically makes you more elligible for aid). at that point i'll just feel like a sucker whose paying to subsidize my neighbors' mortgages

Tamiri said...

I forgot to write that in order to earn that $135K "poor man's" salary, we incurred student loan debt, which we had to repay. We did not consider NOT repaying those loans. So, why should the schools not set up a similar system, whereby they loan the money to families? Even if it takes 30 years to pay back, like a mortgage (which people would never consider defaulting on at the risk of losing their home), this would be "found money", far better than writing off the scholarship amounts.
Another thing to do would be divide the tuition into 12 payments so that you have steady payments all year long. Some electric companies do this. Would you consider not paying the elecric bill?
I am trying to make a point: there is a "system" here and it gets played, unlike institutions such as those I mentioned above.

But, not matter what, I felt and feel that the tuitions are simply too high for the average orthodox family. The tuition needs to be lowered so that more people can pay a greater proportion of their bill.

Somewhat Anonymous said...

I think I remember seeing that Citibank offers K-12 loans, but I don't know what terms they offer on those.

People pay their electric bill, their mortgage and their student loans because there are some very nasty consequences to not paying. I don't think we can (or necessarily should) try to generally impose consequences like that for not paying tuition.

I do agree that tuition is just ridiculously high, and quite possibly out of reach for a number of people, particularly for MO schools. I don't know that tuition can really be lowered, although the scolarship "process" does do that on a need basis to some (generally unsatisfactory)extent.

tanwan said...

To the person who suggested www.debtorsanonymous.org, thanks, but that actually isn't me. I am enrolled in a *reputable* (Consumer Credit Counseling Service) CCCS program and expect to have the debt paid off in about 4 yrs. I HIGHLY recommend it to anyone needing to pay off debt and get out of debt. No more credit cards for me thank you!

One more comment to follow up on financial education and how it pertains to retirement -- I knew a young woman, not yet married, who had a job with a 401k! I could NOT convince her to invest in it at the BEST TIME in her life to do it! She is now married to kollel man with a young baby and no more 401k job. :-(

We need to educate educate educate our young people about financial matters and give retirement funding it's due!

It would help if the general rabbinic community would lend support. Has anyone heard other opinions on this subject other than that expressed by R. Fuerst in this article?

Anonymous said...

Tamiri, I bet plenty of people are already on the "30-year plan" to pay tuition because they have refinanced their homes to get the cash to pay.

Lion of Zion said...

tamiri:

as far as i know it is a regular practice to give a school 10 postdated checks. they can't just demand 50k up front

also, what's the difference between refinancing your home and taking a loan from the school? (which my MO school required already 15 years ago).

in any case, i don't think it is a good idea for schools to be in the banking business. if you need a loan, go to the bank or a gemach (the hebrew free loan society of NY give small loans for tuition).

finally, unless you only have 1-2 kids, i don't see how you can rely on loans to pay for tuition. i'm not going to even try and do the math, but maybe someone can help me: let's assume 4 kids with total annual tuition burden of $60k (which can be on the low side for MO). can only afford $30k and needs to borrow $30k every year. multiply that 30k by 12 years, adjust for inflation, adjust for extra-inflationary rises in education costs, etc.

what is the total loan debt? how much will you be paying in monthly installments and for long? (pick an interest rate).

of course this does not take into account the daycare years, pre-k, kindergarten and college. or paying a mortgage and paying back your own student loans.

i'd like to see some estimates from the mathemiticians, but i suspect that financing kids' education is not healthy

js said...

Well, I did the math:
Assume a 6% interest on a loan
Assume tuition rises 3% a year
Assume family takes out $30K in the first year and 3% higher each subsequent year

Year 1: Borrow $30,000
Year 2: Borrow $30,900 (etc)

The total loan debt at the end is $621,621.72.

Of course that assumes the family made no payments to the loan over the 12 years. I don't know how you would arrange that.

If you made interest only payments over the 12 years, at the end of 12 years your loan would be $451,306.54 and your total interest payments over the 12 years would be $157,067.43.

At the end of 12 years your interest payment is over $25,500.

another jewish accountant said...

was just discussing the lack of retirement savings in the young frum world with a friend this week. I am pretty shocked that a rabbi would recommend that one not save for retirement. I think there needs to be some middle ground where you are able to put away some amount into a retirement account (and hopefully recognize an employer match) while understanding that while tuition is highest, you cant expect to max out on 401k contributions.

I think there is a major issue in trying to apply very black/white guidelines to these situations. every families financial situation is different (even if very similar). the same approach isnt going to work for all, and a big dose of common sense needs to be used which seems to be sorely lacking in many cases.

I began working full time when i was 19, and contributed the maximum amount to my 401k that year. my friends thought i was crazy b/c i wasnt making that much, "and why not live a little?". i knew that no matter how little i was making then, my expenses were the lowest they would ever be, and also the earlier the money is put away, the more it can grow. after i got married and had additional expenses, i had to cut down my 401k contribution, but still continued putting in as much as i could to receive teh match and also that i "felt the pinch" but at least was taking something off the top for long term planning. since 401k contributions are pre-tax there is a also less impact to take home pay then what you ware actually saving.

i am under 30 (close to it though at this point!) and we have close to $150k now in retirement accounts. I say that to prove that it is possible.....we have NEVER been on a vacation other than a few nights with the kids a couple hours drive away, and goign to family for the chagim. we do not live lavishly, and try to live within our means including paying tuition for our kids. these are choices we have made. am i a martyr for not going on vacation, my kids never having been to israel? absolutely not, i think it would stress me out more to take a vacation and have to worry about what will happen to me in 30 years time (yes, im a stereo-typical accountant).

if these rabbis realized what the true cost of those few weeks off is (a few thousand dollars invested today growing over 20+years) they would realize that the better advice would be to forgo the vacation, and put the money into a retirement account.

a friend of mine was telling me how they just "cant afford" to save for retirment right now.....she was driving a new car (nice one) wearing a new sheitel (custom) and eats out quite frequently......I have no issue with that as long as I am not paying for her kids to go to school, but guess what, she does receive a break on tuition which eseentially I (and others paying full tuition) are paying for.....

its all about priorities, and no amount of logic is going to convince people to change their perspective.

SephardiLady said...

i think it would stress me out more to take a vacation and have to worry about what will happen to me in 30 years time (yes, im a stereo-typical accountant).

I guess I am a sterotypical accountant too. I literally could not live the "normal" Jewish way.

My husband and I have nicknamed the aggressive retirement saving starting before marriage as "frontloading" it will be the topic of my next post iy"h.

Ahavah B. said...

"When considering rent vs. mortgage: people forget to take into account the INTEREST, which is lost money. If you borrow $200K, you are probably paying back double that, if not more, over 30 years. Please correct me if I am wrong on this. Meaning: your 300K house, which you borrowed 200K to pay for, actually ends up costing you much much more than $300K!!!"

Some information on that:

If you look at your "Truth in lending" sheet that came with your mortgage documents, you will see that if you make all your house payments on your 30 year mortgage, and your APR is in the 5-6% range, you will be paying a little over 2x the "price" of the house after all the mortgage payments have been made.

So in order to actually make money on your house, after 30 years you would have to be able to sell your $250,000 for more than $500,000 just to recoup what you paid on the mortgage - not including every repair, remodel, upgrade, and maintenance you performed, plus taxes and insurance over 30 years.

That means your property will have to appreciate in value over 3.33% per year, and housing values have actually gone DOWN an average of 13% in most metropolitan areas in the past year, and are forecast to lose as much as twice that before the mortgage crisis plays out. So right now, if you bought your house since the year 2000, you most likely cannot sell it for what you paid for it. That means in real life, you're behind - you lost equity instead of gaining it. So unless you can own your house free and clear for a couple of decades after you pay it off, you will not make any money on it.

We had a very nice down payment on our condo, because we sold our house to buy it - and our mortgage was just $109,000 to purchase the condo. We are paying 5.875% interest, a 30-yr fixed rate, and according to the truth in lending statement, we will have paid $232,562.14 (not including taxes and insurance) at the end of the 30 years. We bought the condo in October of 2005, and according to the amortization schedule here, the date we will be paying more principal than interest from our payments is not until October of 2023.

Taxes are wildly variable by city, county and state, as well as insurance, but if our escrow payments are representative, they add about 29% to our payments.

So in order to get everything you pay on a house back, you have to double the asking price and add about 30%, just to recoup your upfront costs without any repairs and remodels, etc.

If the statistics given above by another commenter for average yearly appreciation of house values are true, even presuming your house hasn't lost value since you bought it, you aren't going to get back what you put into it, most likely.

Therefore the only real value in owning is being able to remodel, have more space, and decorate as you like. There isn't any point in using it as an "investment." Real inflation, that actually counts food and fuel (unlike those "official" monthly figures the government puts out that conveniently ignores these expenses) is running 6-7% yearly. That means housing isn't even in the neighborhood with keeping up with inflation.

Some things to think about.

And by the way, somewhat anonymous, I hope you're not banking with citibank, wells fargo, countrywide, national city bank, or any of those other banks that you think are "safe," - these have all had to close down entire divisions because they are bleeding red ink all over the place. And you can expect to see more big name banks in the news, also. All of the safety measures that were put in place after the great depression to keep banks from losing all your money were removed back in the 1980's. There is nothing stopping banks from all savings using fractional reserve banking, and losing it.

Ahavah B. said...

Concerning the FDIC:
This information is widely available, but here is a nice concise paragraph from an article that is just a couple of days old:

http://www.m-cam.com/display_news?id=240

"The actual solvency of the Federal Deposit Insurance Corporation is relatively indecipherable due to the fact that their treasury management processes (and the risks of their own investment strategies) are not uniformly disclosed with sufficient transparency. The FDIC was set up for isolated problems with a few bad banks but is NOT prepared to "insure" the system in an industry-wide crisis. The actual liquidity reserve of the "insurance" that Americans view as their safety net is 1/100th the actual exposure of outstanding deposits. The actual coverage ratio for the Bank Insurance Fund (BIF) fell below 1.25% in 2002, the same year that less stable credit practices were adopted by America's leading banks."

Somewhat Anonymous said...

Ahava B. - Whatever the FDIC's official funding may be - I very highly doubt the U.S. Federal Government is about to default on its obligations. And if it does, we all have much larger problems than where we do our banking. Besides our dear friends in Abu Dhabi just bailed out Citibank, so I'm alright.

Mike S. said...

Ahavah: I hope not too many people buy what you write.

In the first place, any renter ought to have a renter's insurance policy, if for no other reason than to defend a lawsuit if anyone falls in your apartment. Homeowners policies cost about the same, because most of the risks are the same--the main difference is the structure, and houses very rairly burn down.

In the second place, if you want to look at housing as an investment it makes sense to view the amount you have invested as the amount you paid above what you would otherwise have paid in rent. After all, you weren't planning on living on the street. I don't know what the story is now, but when I bought my house, monthly rent on a nice 3 bedroom apartment was more than the carrying cost on my 4 bedroom house. And rents, I am sure, have gone up far morethan my carrying costs, which are only a little higher than when I bought (taxes up, interest down.)

Now certainly anyone who bought from about 2003-2005 would probably been better off renting for a couple years and buying at the bottom, but market timing in real estate is only a little less difficult than in the stock market. I imagine that most people who bought before around 2003 are still ahead. Most of the decline in the last year or so was erasing the rather extravagent gains of the couple of years before that.

Renting is advantageous when housing prices are falling. If you can afford the down payment, buying is usually better when they are rising. They rise more than they fall. I would concur that if you can't come up with the down payment that the no down payment loans, if you can get them are really risky. Also, you shouldn't count on the equity in your home to finance your retirement. You have to live somewhere when you retire afterall, and rents will likely be higher then, they are now. You might be able to pull some equity out by selling and buying a cheaper place, but certainly not all of it.

miriamp said...

"a friend of mine was telling me how they just "cant afford" to save for retirment right now.....she was driving a new car (nice one) wearing a new sheitel (custom) and eats out quite frequently"

Just to play devil's advocate for a moment: what if a relative gave them the nice car and bought her the sheitel... but only gave them the money on condition it was used for x, and wouldn't have given it for tuition payments? (The eating out I can't excuse under that premise, though.)

I can see vacations working the same way. Relatives with money to spare, wants family to visit them, offers to pay airfare, etc., but won't give money for tuition or other expenses.

As for FDIC, our bank (Netbank) was actually closed recently by federal regulators, and our intact FDIC insured accounts were handed over to another bank. So as long as it's not every bank all at once, it seems to work just fine.

SephardiLady said...

You have to be smart about the home you purchase, but I don't view my house (which I have purchased for the long forseeable future-i.e. probably 30 plus year)as the bank or as an investment. I tend to look at it simply as a place to live, and quite frankly there are not too many options outside of apartments and condos, which, at a certain point, became too difficult to raise our children in.

DAG said...

Lion, I am harder to find w/o the blog....and this guy isnt a computer expert... he tried to use my satirical pieces to hurt me, so I am avoiding satire when posting on other blogs....

Anonymous said...

in all of this discussion where does
maaser fit in?

does one who is on kollel or receiving aide from the government ( ie food stamps etc) or community have to give maaser?

aryeh-baltimore said...

miriamp and all--a word about the FDIC. It is NOT why your NetBank accounts were saved. They were saved because another bank (ING Direct) acquired the accounts. One private company saving the assets of another, because it was in their own best interest. See, when a bank goes under, the FDIC doesn't need to pay out because there's another bank eager for those accounts.

The only time the FDIC would be needed would be all banks going under, and as we've discussed, they don't have the money to cover that.

So... I ask you... why do we need an FDIC?

For further reading, see anything by Milton Friedman.

Anonymous said...

One other thing about the final cost of the house, if you subtract out of the cost what you would be spending on rent for 30 years you probably end up ahead of the game. I am not sure if tuition is really the biggest problem. I am lucky to, B'H, have a good job, I earn around $150,000-$200,000, live in the greater NY, NJ area and with only 1 kid in yeshiva, at $12,000, I still find that with all of the other expenses we are just getting by with a decent amount of cc debt. We live in a house with out of controll property taxes, (the have gone up close to $5,000 in 2 years) and all the other expenses, food, gas, electric, car lease, ect. it's hard to get by. I am very makpid to make sure that I max my 401K to the point that I am being matched to the max and I generally get a nice tax refund back (last year it was over $14,000)(I work on commission and can't determine how much I'll actually be taxed so I take the standard deductions so as not to have to owe anything). I see the tax refund as a forced savings that I can use to pay tuition. But, the basic cost of daily living is so high that one needs to make $200,000 to get by (smaller house no fancy cars, no vacation ect.) in some MO communities in the NY area, and that is without factoring in tuition.

Ahavah B. said...

Mike S:

What I wrote came directly off my mortgage papers - it doesn't get much more factual than that.

I'm sorry that reality doesn't match with what your real estate agent told you - it's called "moral hazard." The agent can't and won't tell you the truth because it hurts their bottom line.

Mike S. said...

Ahavah:

I need no one to tell me how much interest I am paying. I know very well. But if you rent for 30 years, you can expect your rent to go up substantially over the period. And, at least around here, you will probably be paying the same utility bills and insurance that you would if you owned.

I have no problem with the costs you cite for the house, give or take that my taxes seem a lot lower than yours, but that varies with location. I do think you make a mistake by not comparing them to want you would be spending if you were renting. It is likely to be the same or higher. In fact, if you stay in the place for 30 years, the rent is likely to be alot more, as it will keep rising for 30 years.

As I said, when we bought the house our expenses were less than renting a similar house would be. In fact, they were only about 10% more than we were paying to rent a 2 bedroom apartment. Of course, you can rent a smaller place, but that is true if you buy too.

I agree that one should consider a home primarily a residence and not an investment. And it is unwise to render yourself so house poor that you are taking on credit card debt to pay the bills. That's nutty. But my experience is that owning a house is far better economically than renting a similar property. I am assuming, in what I say, that one is intending to stay in the place for a long time. if not, the transaction costs with selling make renting more favorable.

miriamp said...

miriamp and all--a word about the FDIC. It is NOT why your NetBank accounts were saved. They were saved because another bank (ING Direct) acquired the accounts. One private company saving the assets of another, because it was in their own best interest. See, when a bank goes under, the FDIC doesn't need to pay out because there's another bank eager for those accounts.

Federal regulators were still involved -- it was in their best interests to make sure "another private company" stepped in to insure that they (Feds) wouldn't have to pay out. Without FDIC, why should anyone step up to help if a bank goes under? We need it for the (maybe false) sense of security it provides investors so that they put their money in the bank in the first place, and also to put pressure on the government to make sure the money stays protected. Do I really care where the money came from, or just that my money survived the closing of my bank? So the system works as it exists.

miriamp said...

As for the topic at hand, my husband never got around to setting up his 401K plan (despite my urging) before we had kids in school... now it seems tricky to start diverting funds from either tuition or the household budget, even at the loss of those matching funds. When I asked him about it, his response was simple: "Who says I get to retire?" While I know many see this as shortsighted, the future is unknown, and our commitment to our children is now. I wouldn't pull funds out of a 401K if it already existed, but to start one now?

Honestly Frum said...

The thing that I don't get about not putting money into a 401K with matching is that s/o is giving away free money. If you were to walk down the street and s/o wanted to give you $2,000 I am sure you would take it.....am I missing something?

Tamiri said...

I wonder what would happen in a case like that of miriamp, if the tuition c'ttee was informed that they have no retirement plan. Would they lower the tuition bill or be happy they have a family willing to forgo a necessity such as this.

another jewish accountant said...

miriamp - whether it is the young family themselves or their relatives paying for it, I dont really think matters. however, in this case, i know that that is not the case. what totally just boggles my mind is what people are thinking is going to be 40 years from now when they are in their 60s/70s, and just physically CANT work like one can in their 20s/30s. then what?

also, i see that a lot of the same people saying they cant save for retirment are also the ones asking for a break from the school tuition committee. seems logical to me until i see those same people living a lifestyle that is not in sync with that. once again, not my business, exept when my tuition and other community organization costs go up each year to continue to "finance" their priorities.....

where is the line to be drawn on these issues? its hard to ignore what one sees around them when it seemingly has an impact on them (increased costs to subsidize others mis-guided priorities).

I have no problem with deserving families getting a break on tuition and think that in determining eligibility the family should be allowed (and expected) to have a retirement plan. however, good intentions alone can not make these things run smoothly when the tuition committee is faced with too many people that appear to be "scamming" the system, which makes it more difficult for the truly eligible families to a) get the assistance they deserve and desparately need and b) avoid embarrasing intrusive scrutiny by the tuition committee to verify eligibility.

on the house topic, a house bought as a primary residence is a place to live, and shouldnt be viewed as an investment or bank account. you cant really time the market, since people need a place to live a certain time, not when the market is best for their purchase. that said, when you do need a home, its always wise at that point in time to determine the cost of renting v. buying, and make a decision. I have a friend who sold her house in 2002 thinking "wow, the market is at its height, lets sell, rent an apartment and wait it out and buy back in when it drops" - she had made about $50k on a $175k house at that point, and sold it for $225k feeling great about the $50k that was put away towards the house they would purchase once property values plumetted as they thought they would. well values continued to go up, up, up, and she is now in a 2 bedroom apartment, paying more in rent than her mortgage was on her little 3 bedroom house with 5 kids and cant afford to get back into a house because even with the recent market drop, houses are still significantly higher than what she sold for. the house she sold in '02 for $225k sold again in early '07 for $579k, so even if the value has now dropped to $450k, its still much more than wheat she sold it for, and now their mortgage would be much higher......theres always examples both ways, but that to me is just evidence that your house is a place to live and raise your family not your primary source or income.

mlevin said...

When I was expecting my second, back in '91 we had two choices.

1. Move into a larger 3 bedroom appartment with a terrace and 2 bathrooms. Rent = $1,500 including utilities + payment for parking space.

2. Buy a house. Three bedrooms 2 bathrooms with rentable studio. Mortgage =$1,500 plus all utilities + escrow + upkeep + real estate taxes - rent - income tax.

End result it would be a little more expensive $150 a month more to buy a house.

The first few years it was hard to live in a house and we had to do without. Now, we completely paid off this house and are living in it for free. Tenant covers taxes and most of the utilites.

Yes, there is an upkeep cost, but comparing to monthly rent it is nothing. In addition the equity of the house more than doubled and there are no roaches.

Somewhat Anonymous said...

mlevin -

I think what your example and others show is that where the costs are similar, it is better to own than to rent (and also that having a tenant is a good way to afford homeownership).

By contrast rent on my 3 BR apartment will be $1,850 and I would not be able to buy a house (in the same area) for less than $500K, which means that mortgage payments (with RE taxes and PMI) would be something about double that.

another jewish accountant said...

building equity in a house: $xx.00
tax savings: $xx.00
no roaches: Priceless!

Charlie Hall said...

"why do we need an FDIC"

In a number: 1933.

More seriously, without the federal insurance people will be reluctant to put their money into banks given that there are safer investments like government bonds. The economy would suffer. Prof. Friedman did not seem to have recognized the important positive role that governments can play in the economy. (I could cite many, many more examples.)


" out of controll property taxes, (the have gone up close to $5,000 in 2 years"

You can move to NYC. Property taxes on our house are $4,400/year.


"the basic cost of daily living is so high that one needs to make $200,000 to get by (smaller house no fancy cars, no vacation ect.) in some MO communities in the NY area, and that is without factoring in tuition."

Agreed. And that means you have two options: Be a successful professional two career family, or have a successful business.



"Without FDIC, why should anyone step up to help if a bank goes under?"

In 1933, nobody did. Lots of folks lost their life savings.

Somewhat Anonymous said...

"You can move to NYC. Property taxes on our house are $4,400/year."

But of course then you have to pay NYC income taxes - which top out around 4% or so at 90K I believe - For someone making 200K that adds around 6.5-7K per year in taxes. [People are welcome to correct my math - all numbers are married filing jointly]

Ora said...

Most renters that I know don't have a long-term contract (this is Israel, so things might be different). They sign a deal with their landlord every year or two. If you live in an area where property values are rising, like I do, that means that every year or two you face either paying much higher rent or moving. Moving costs about 2,000 shekels (the alternative is not owning furniture, but then you pay much more in rent to get a furnished apt + your options are very limited). Not only does moving cost money, but searching for a new apartment takes time and often money, and is stressful (the last time we moved I was 9 months pregnant, and we're looking forward (not really) to doing the same thing next summer). So even if rent is cheaper than a morgage now, over the next five years you could end up either paying much higher rent than you had planned or paying to move repeatedly. Once your kids start school, moving often means pulling them out of school--not an option for many families.

If you want truly nightmare stories of insane property prices, btw, nothing beats Jerusalem. High natural population growth + 1,550 apartments a year purchased by foreigners (and not rented out) + decrease in terrorism (a good thing, obviously) + huge number of Arab buyers hoping to be on the right side of the wall = rents that have almost doubled in the past four years (+ 10,000 young people leaving the city each year). In 2008 we will, unfortunately, almost certainly be among those leaving.

The question of whether you make more money off of savings or home ownership seems academic to me. If I don't buy a house with a 2,5000 shekel/month morgage, I'm not going to put that money into savings, I'm going to spend it on rent. As for renters not needing to pay for repairs or city tax--in theory, maybe. I suppose we could put whatever money we save on insurance into savings, but I doubt it would make up for the difference between owning a home and renting for the next decade.

Somewhat Anonymous said...

ora -

I can't speak to the Israeli rental market, but it seems like many more people rent permanently in Israel than in the US, where renting is viewed more as a transitional stage leading to eventual home ownership (for most). Leases tend to be for one or two years, but the market is such that there aren't wild spikes in rents. Also, rent stabilization laws limit the amount that rent can be increased year to year (in NY anyhow).

Anonymous said...

There really is only one big answer that everyone wants to avoid.....PUBLIC SCHOOL.