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Old 04-18-2010, 06:59 PM   #61
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So when does spending on non-discretionary items become discretionary. Take two military officers. They both retire on the same date with the same pension and health care, one lives on his retirement, the other is never able to live on his. My point is the one that can not make it, chose his spending pattern. He chose to drive a Lexus rather than a beater. He chose to live in a MacMansion rather than a smaller home. Those things are discretionary, imho, and one should not feel sorry for him having to work past 65.

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Old 04-18-2010, 07:08 PM   #62
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Originally Posted by Nords View Post
Have you read her book "The Two Income Trap"? Because I think you're missing some of her points.

1. Mortgage lending of the 1960s/70s used to require 20% down payments, limit buyers' mortgage payments to 28% of after-tax income, and limit total debt payments to 36% of after-tax income. As you've mentioned, most of those limits have been blown off by "modern" financing.

2. We've done it to ourselves. Families have bid neighborhood housing up to insane price levels in our desire to send our kids to good schools. Unfortunately, unlike private-school tuition or childcare, mortgage payments last a lot longer even without cash-out refinancing. And when every single house in the neighborhood is being bid up by the fabled four-person family then it doesn't matter how many kids you may have or what your marital status may be. You have to bid at least as high as them or live in a "bad" neighborhood.

3. Well, maybe that marital status matters in one important way-- income. One of the ways we've outbid ourselves was by putting two incomes toward housing payments. If two incomes are required to support the mortgage payments then neither income is discretionary. Layoffs and part-time, let alone ER, are not options.

4. Your comments about quality & safety of home, cars, & healthcare sound suspiciously like the government justifications for hedonic adjustments to the CPI. Only problem is that you can't eat hedonic adjustments...

Her point is not that we're failing to appreciate the quality. Her point is that we're spending way higher percentages of our income on non-discretionary items like homes and healthcare. If two incomes are necessary to support that non-discretionary spending, and one of those incomes is laid off, then there is no discretionary spending to cut back. Whether the hedonics are accurate or not, the percentages are the issue.
Let's see:

(1) No I haven't read her book---though I suspect it would be an interesting read. Thanks for making me aware she had written one.

(2) Regarding the mortgage issue---not sure I understand your point. If folks today chose to put down more money, it would lower their payments (and hence their share of income that goes to housing expenses). Nobody forces people to take out large mortgages with 95-100% financing. That is a personal choice, and it obviosuly can be a problem (as we have recently seen).

(3) I think schools are one component of the house price issue. But my guess is that another major component is people's desires to keep up with the Jones by making improvements to houses with new appliances, granite counter tops, etc. I bet a lot of people financed these improvements by taking out second mortgage, HELOCs etc. In turn, her data show that our share of money going to appliance purchases, etc. have declined. We used to pay cash for appliances--now we build them into our housing costs by mortgaging and remortgaging our homes. I suspect that this is true for other expenses we incur--autombiles, travel, food (dining out)---lots of these items were financed by increasing our housing costs (again, 2nd mortgages). It would be interesting to see how much of Dr. Warren's hosuing costs are attributable to payments on 2nd mortgages and HELOCs. My bet is that it much higher now than in the 70's.

(4) Not sure why you use the term "suspiciously" to describe my attempt reference the change in quality as part of the reason for price changes. It is not an attempt to be "tricky" or "disingenuous" (sp?)---I think it is a legitimate and real reason that costs for some goods/services have gone up. This is true story that I share only to illustrate my point. I was diagnosed with a form of cancer that would have killed me had I been treated with the chemotherapy drugs and medcial knoweldge that existed in 1970. Fortunately I was diagnosed in 1993---drugs, diagnostic tools, and surgical techniques not available in 1970 saved my life. Total list cost of my treatments (who knows wht the hell the insurance companies really paid) was over $250K. I for one was happy to be paying a larger portion of my income to medical care in 1990 than 1970. Maybe I would have been better off financially in 1970, but I would be dead. Of course we are paying more for medical now---it is better than what it was. Would you rather pay less for a lesser quality of care? I think if you polled most people they would prefer to pay more for better care, and there's the rub. Ya gots to pay for what ya wants.

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Old 05-12-2010, 04:56 PM   #63
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What are the solutions? I have no idea! I know at least one friend who is going to be destitute when she can no longer work. Probably her children will end up helping her, I hope. I have another friend who continued to spend freely (pre-recession) and said that if she ended up without enough money then her children could damn well support her. But she changed her tune once the recession took its bite and she has downsized her life considerably. So people will make changes, and some will find their own solutions. That's all we can hope for, I think.

I have to say that planning for retirement can only accomplish as much as fate allows. There are always the "black swan" events, such as the current Great Recession. Even if you planned well and survive this recession, there's no guarantee against something else that might come along and snatch away your financial security. Like devaluation of the currency, for example.

Whenever I get angry about the irresponsible spending and debt that occurred, I have to remind myself of the stupid things I have done on occasion. Even though my ex and I were pretty responsible and I am financially independent, I am human, just like the rest of you and I make mistakes. With that in mind, I have a hard time blaming others for being stupid.

I do NOT have a hard time blaming the investment banks and government though. I always assumed that stupidity could be ameliorated by groups of people working together and institutions with rules and regulations to provide some structure. Apparently, not.
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Old 05-13-2010, 12:00 PM   #64
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That being said, I could end up working until I die if my DD isn't able to live on her own. I'd rather have the $ to put her in a nice assisted living home vs. a medicaid one.

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