Wednesday, November 26, 2014

Paying off the mortgage or adding to a 401(k) plan.

This post was originally published in my finance memos blog on word press.   I am revamping that site so it addresses more technical economic and financial issue.   

I recent wrote a math post on how student debt is delaying house purchases.   The empirical research mentioned in this post suggests that delays in home purchases that lead to delays in equity build up can reduce resources available at retirement.

Question:  I am in my early sixties and I would like to retire as soon as I reach 62 and can claim Social Security.  I make regular contributions to my 401(k) and my 401(k) has increased in value over the last few years.  I don’t have much in liquid savings outside my 401(k).  My home mortgage is still quite large and under the current contract my mortgage will not be paid off until I am 70.  After retirement, my only income will be from Social Security and from 401(k) disbursements.  What should I be doing to better prepare for retirement?

Analysis:  Again, I am going to start with caveats. All situations differ.  The devil is in the details.

Some general observations:

It is fantastic that your 401(K) is back.  However, retiring with all of your money in a 401(k) is not ideal.  Funds in a 401(k) are taxed as ordinary income.  Disbursements from a Roth IRA are untaxed after age 59 ½.   Assets that are not in a tax preferred account are taxed at the capital gains rate, which is lower than the ordinary income tax rate.   All else equal, a person with 401(K) assets needs to have accumulated more (much more) than a person with Roth assets because the person with Roth assets has prepaid his taxes.

The continued existence of your mortgage after retirement is also less than ideal.  Your need to pay your mortgage combined with your lack of other income means you will have to start disbursing funds from your 401(K) plan as soon as you retire.  You cannot pay off your mortgage without taking a large tax hit because all of your funds are in your 401(k) plan.
Work by Jonathan Skinner in the Journal of Economic Perspectives indicates that owning a home reduces the amount that a person needs to save for retirement.

 However, Dr. Skinner’s estimates are based on the assumption that the mortgage is paid off by age 60.

It would be nice if you could delay claiming Social Security for a couple of years. Individuals can claim Social Security benefits as early as 62 but individuals who claim prior to the full-retirement age have their benefits reduced.  Early claiming of Social Security also reduces widows and spouses benefits.  See my earlier post.

You could choose to sell your home, live off of the capital gain from you home, delay claiming Social Security, and reduce or delay disbursements from your 401(k) plan.  In most circumstances, capital gains from the sale of owner-occupied homes are not taxed.  This strategy, by keeping your marginal tax rate down, might facilitate conversions from your 401(k) to a Roth IRA.

There are a lot of risks associated with selling your home early in retirement.  Would you be happy in a new place?  Most people delay selling their home until later in retirement often when they are forced to sell possibly because of an illness.  Would your new home be a rental or will you buy a smaller less expensive place?  The amount you could buy is limited by the size of your capital gain and your other needs.  If you become a tenant, your rent payments will rise over time.

Some concluding remarks:

Your situation – most savings in your 401(k) and a mortgage after retirement – is not unusual.  People can reduce their tax bill in their working years by taking out a large mortgage and by making the largest possible contribution to their 401(k) plans.  However, these working-year tax driven decisions can lead to more complicated financial issues later in retirement.

Friday, October 31, 2014

Kaci Hickox is being treated in a capricious, arbitrary, and illegal way.

I have no problem forcing sick people into quarantine.   But government actions that impinge on people’s rights need to be based on science and costs and benefits.   There is no scientific basis for the actions against Kaci Hickox.  These actions would not pass any rational cost-benefit analysis.

The actions taken against Kaci Hickox, first by the governor of New Jersey and next by the governor of Maine, were motivated by whimsy and caprice.  

There is a very large economic and philosophical literature on the proper role of government.   My thoughts on this topic are partially formed by the Michael Sandel’s televised course on justice.

A Comment on Justice and Government:  Sandel’s courses discusses different views of the role of government.   He contrasts the libertarian view with its emphasis on individual rights and the utilitarian view with its emphasis on a government that bases decisions on costs and benefits.  He also looks at Locke’s attempt to rationalize these approaches.

An analysis of the draft based on Locke’s world view, may be the best analogy to quarantine issue.  Drafts are permissible if they are not arbitrary or capricious.    A draft of people with green eyes would be both.  A nation may draft a person and order him to a position leading to certain death.  The army has almost absolute power.   But as Sandel states in one of his lectures no officer in command can take a dime from the draftee.

Comments on Hickox’s Treatment:

Comment One:  She was detained for seven hours in New Jersey and isolated in a tent.   She had been in close quarters on the plane with many others for probably around 10 hours.   To the best of my knowledge, none of the other people on the plane with her were detained or tested.

Comment Two:  It has been confirmed that she does not have Ebola.   People who were hospitalized with Ebola have been set free from the hospital and hugged by politicians within days.  Why would it be permissible for a person who tested positive for Ebola to be released within a week and continue to detain a person who never tested positive for 21 days?

Comment Three:  It is possible that Governor Christie and Governor LePage moved against Hickox because of their political interests?    This is not permissible.    Remember the analogy to the draft.    The military can order you to certain death but they can’t take a dime from you. 

I recently read that the Democrat opposing LePage in the election in a few days supports the quarantine.   This is disgusting.   The Democrats have a major problem in their inability to stand for basic principles.

Concluding Comments:

Comment One:  there have been other pandemics in the past that have killed people.

I wrote a post suggesting that government can and should be more proactive.

I am not against all forced quarantines --- only capricious politically motivated ones that have not medical rationale.   

Despite the ACA we still have a large number of people in this country without health insurance.    The uninsured often only get a quick exam at an emergency room before being sent home.

The number one thing that needs to be done to prevent health insurance is to increase and expand the quality of insurance coverage so people with Ebola and other diseases are not routinely sent home from the emergency room back into the community.

Quarantining an Ebola-free nurse is not useful.

Friday, October 24, 2014

Lava flow in Hawaii is all President Obama’s fault

Lava flow in Hawaii is all President Obama’s fault

Lava is flowing in Hawaii.  It is one mile away from a small town.

President Obama is to blame.   This is clear to me and should be to you.

If Romney had been elected President the army with is high-tech lasers would have created a force field at least three weeks ago and we would not be in this situation.

Clearly, this is not the only crisis that can be blamed on President Obama.  

President Romney would have given tons of arms to the rebels in Syria and there would be a Democratic Syria with no ISIS in the region.  (None of these weapons would have been seized by ISIS.)

President Romney, with his background in economics would have ignored the cost-benefit studies and would have banned traffic to Africa, thereby protecting us all from Ebola.

Also, President  McCain or Romney would have increased the number of people with health insurance perhaps by creating a law that allowed for state exchanges as an alternative to employer sponsored insurance.   This new insurance would have been adopted by states like Texas and people without insurance and with Ebola would not be turned away from emergency rooms.

Emergency rooms are key to early identification of many diseases.   Empirical studies find that uninsured do not have much access to health care even at emergency rooms.   I will find my old papers on this topic and will post them next week. 

President Obama’s resistance to comprehensive health insurance reform is weakening us in the war against Ebola.

Clearly, everything is President Obama’s fault. 

Some random thoughts on third parties

There is a real possibility that the 2016 election will be a rematch of Bush vs. Clinton.    This, if it is happens, is a status quo election.   People who don’t like the way the nation is headed would have to vote for a third candidate.   This post ruminates over the likely importance of third-party candidates.


The most successful third-party candidate in history was Theodore Roosevelt in the election of 1912.  He took 27.4% of the vote, a higher total than the Republican nominee William Howard Taft.  Roosevelt took 88 electoral votes compared to 8 for Taft.

A fourth candidate Eugene V. Debbs the socialist took 6%

A fifth candidate Eugene Chafin from the Prohibition party took 1.4%.


By comparison, third party candidates were inconsequential in 2012. 

In 2012, the libertarian party got 0.99% of the vote and the Green party got 0.36% of the vote.

The 2012 results suggest that third parties are down for the count but not so fast.


The 2014 elections suggest that third party influence is not trivial and could grow again.

Third party candidates could affect key Senate races in 2014.  

Best evidence of this is what happened in 2008 in Georgia and in North Carolina the Libertarian candidate got over 3% of the vote.  

In 2008, the Libertarian forced a runoff between the top two candidates in Georgia.   The Republican won the runoff handily because Democrats did not turn out for the runoff.     The same could happen this year but I believe Michelle Nunns is proving to be an adept candidate and could make the race about her not Obama.

Democratic Senate candidates are in third place in both Kansas and South Dakota.   

In Maine there is a viable independent running for governor.

In Florida, the Democrats nominated a Republican to be their nominee for governor.

In two states Kansas and South Dakota the Democrats are in third place in the Senate contest.  In Kansas the independent is likely to win.

In Kentucky, the Democratic Senate candidate won’t even acknowledge having voted for President Obama.  If this strategy proves successful then Kentucky, like Kansas and South Dakota, is a place more favorable for Independents than Democrats.  

The TV show Scandal:

The TV show scandal in the third season had a storyline of a three-way election -- A Democrat, a moderate Republican and a social-conservative Republican.   The script writer interrupted the election with a bunch of scandals.  (It came out that the Democratic nominee knew he was killing his wife’s lover not a rapist.   The chief of staff for the President could have stopped a bombing and the President won reelection because of sympathy over the death of his kid.   Spoiler alert:  The kid was killed by a secret service agent by order of the former head of B613, Olivia Pope’s dad. )

I guess this section of the post qualifies as a digression.  In my view, the writers of Scandal should have deadlocked the election and thrown it to the courts and the House.   The Scandal components would have continued and been mixed with a realistic political drama.

Implications for 2016:  Could we have a deadlock in 2016 due to a third-party candidate?   Well if the two main candidates are Clinton and Bush or Clinton and Romney we have a Seinfeld election, one about nothing.  

I have previously written about the prospects of Hillary running again. 

Will write more about this after the election.    My main points are is that we as a nation need some discussion on issues and potentially new approaches to break deadlock.    This is not going to come from Hillary or Jeb – both smart dedicated people.

A third candidate win in Kansas could decide the Senate.

A victory by a third candidate in one or two states in 2016 will throw the election to the House or the Courts or both.  

I hope the Scandal screen writers read my blog.  

Tuesday, October 14, 2014

Alison Grime’s right to privacy?

Alison Grimes continues to refuse to state whether she voted for Barack Obama.  She claims a right to privacy because the Constitution guarantees a secret ballot.

My comments:

Comment One:  Alison Grimes is running for office as a Democrat.   Typically leaders when they are running for office let people know where they stand.   She has no legal obligation to announce her vote.  Candidates typically waive this privacy right.

Comment Two:  The right to a secret ballot protects people from persecution.  The Senate candidate from Kentucky does not need to be protected from prosecution.  

Comment Three:  President Obama is being vilified in a personal way that differs from the way politicians are typically treated.   Alison Grime’s refusal to state whether she voted for President Obama plays into the Republican narrative that President Obama is different – perhaps even evil.

Comment Four:  I have differences with President Obama but let’s face it he is not really as liberal as depicted.   Alison Grimes whiffed on a lob.   Here is a response:

Did you vote for President Obama?

Yes but this does not mean I support everything he has done.

I can’t imagine what America would be like if John McCain had won the 2008 election and the economy continued on the course that existed then.

Unlike my opponent I want to modify and not repeal the ACA.   Repeal of ACA would lead to many (give number) Kentuckians losing their health care.

Yes I voted for President Obama.  If in the future a Republican gets elected I will work very closely with the new President to help Kentucky and the nation.    My opponent chose to put his partisan agenda ahead of the state and national interest.   The results have been tragic. 

Comment Five: Her inability to state that she voted for a two-term Democratic President is demoralizing.    She is going to deflate her own turn out, especially among blacks.

Comment Six:  Alison Grimes, like Hillary, believes that one can run for office and not tell the people where she stands.     Where does Hillary stand on Keystone, on Social Security COLAs, on student loan debt proposals on charter schools, ……..  The only way we will find out is if strong candidates  -- A-list candidates – challenge her.

Comment Seven:  Alison Grimes despite her relative lack of experience was not challenged for the Senate nomination in Kentucky.  She was hand picked by the Clintons and is a child of privilege.   This is what happens when nepotism guides the candidate selection process and you don’t test your candidates.

Concluding thoughts:  Most Democrats don’t agree with President Obama on everything.  This is a main difference between Republicans and Democrats.   President Obama is a good man who took on a tough job and should not be vilified.   Alison Grime’s inability to state she voted for the President plays into a Republican narrative that the President is evil.  It is demoralizing.  

Paint Kentucky red.