Scratch troubled, we are screwed as a country

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Scratch troubled, we are screwed as a country

I read with great alarm on CFO.com that as the housing and mortgage crisis deepens, people are dipping into or even cashing out retirement funds.

“In the last four or five months we have seen an absolute onslaught of people trying to do hardship withdrawals and loans out of 401(k)s,” Mark Anderson, CFO of Granite City Electric, told CFO magazine in October. “What has happened with housing and the economy has really blown up for people at the lower end of the spectrum.”

When you cash out a retirement fund to pay down a mortgage, you take a double hit. First, you lose the money itself in a market that is declining rapidly, dumping good money after bad. Second, and most perilously, you create an enormous opportunity cost for yourself that you will in all likelihood never recoup in your lifetime.

Let’s do the math. Let’s say you are an eager 21 year old college graduate, with a great outlook on life, a job that pays a salary of 2,000 a month before taxes, and 45 years in the workforce ahead of you. If you start saving today, 3% of your income with employers that match with a 3% contribution, and your investments give a safe return of 6% over your working lifetime, you’ll retire at the age of 66 with roughly330,000, give or take.

Now, let’s say you, at the age of 50, make some bad choices and consider bailing yourself out of a mortgage problem with the 110,000 you’ve accrued so far in life. Boom, problem solved, right? Wrong. You’re now in incredible trouble. You will retire in 15 years with a grand total of only35,000 in the bank (at the same savings rate). To retire with the same amount of money as you would have had, you would need to save 30% of your income instead of 3%, have an employer that matched 6%, and hope for an 11% return over those 15 years. Otherwise, you have to depend on the government and HOPE that Social Security is still solvent when you retire – otherwise, you will not retire.

What SHOULD you do if you find yourself in super-serious, no end in sight mortgage trouble? Walk away. Mail in the keys to your lender, declare bankruptcy, rent a nice apartment somewhere, and work off the bankruptcy. Does foreclosure look bad? Yes. Foreclosure and bankruptcy means you’ll be paying cash for a lot of things for a while. But it lasts 7 or 10 years at the most. 7 to 10 years of bad credit is easily survivable, and you may even develop good personal spending habits by only being able to spend what you have. Compare 7 to 10 years of conservative living with 30 years as an elderly man or woman trying to make ends meet with meager savings. Can’t declare bankruptcy? Leave the country. As long as you have useful skills, there are PLENTY of nations on this planet that are all very nice, and very few of them have credit bureaus connected to the United States.

Truth: the United States is NOT the best country in the world. It’s one of many very good countries, and any flag-waving moron who blindly believes that one country is the best has probably never traveled more than 20 miles past his doorstep. LOTS of good countries in the world.

Unfortunately, for a lot of people, they’ve already dived off the cliff, and that means a certain percentage of the population in the years to come will be gambling that social services and the government can assist them in their “golden years”.

Is that a gamble you’d take?

Like the old Willie Nelson song goes, know when to hold ’em, know when to fold ’em, know when to walk away, know when to RUN.


Comments

24 responses to “Scratch troubled, we are screwed as a country”

  1. Kenny Rogers .. ๐Ÿ˜‰

  2. Kenny Rogers .. ๐Ÿ˜‰

  3. Sometimes we all need a jolt of reality.

    Was it Willie or Kenny Rogers?

  4. Sometimes we all need a jolt of reality.

    Was it Willie or Kenny Rogers?

  5. Apparently it was Kenny ๐Ÿ™‚

  6. I couldn’t agree more, but I am quite certain that the problems go a whole lot deeper than this. It starts with Naked Short trading and ends with packaged Hedge Funds all backed by Dollars that no one actually had to begin with. The depth of the pain is in the tens of trillions and the manipulators are frantic and exhausted. This will end one of two ways, by a complete and total collapse which would catch the Bankers off guard and that won’t be allowed unless Ron Paul gets elected, or it will end with decades of a combination of 70% tax brackets and inflation that will leave us all yearning for Ruppees and Pesos. If you can get your Family to leave with you (I can’t) I recommend Australia or New Zealand (my fav) being in the Pacific Rim they stand to be the new first world centers. Good luck to all.

  7. I couldn’t agree more, but I am quite certain that the problems go a whole lot deeper than this. It starts with Naked Short trading and ends with packaged Hedge Funds all backed by Dollars that no one actually had to begin with. The depth of the pain is in the tens of trillions and the manipulators are frantic and exhausted. This will end one of two ways, by a complete and total collapse which would catch the Bankers off guard and that won’t be allowed unless Ron Paul gets elected, or it will end with decades of a combination of 70% tax brackets and inflation that will leave us all yearning for Ruppees and Pesos. If you can get your Family to leave with you (I can’t) I recommend Australia or New Zealand (my fav) being in the Pacific Rim they stand to be the new first world centers. Good luck to all.

  8. Apparently it was Kenny ๐Ÿ™‚

  9. I agree that the situation is somewhat dire…but I don’t advocate cutting and running. I recommend advocating that all work toward a solution…and just keep working until we get through the crisis. There are many deep, deep pockets that will see a downturn as an incredible buying opportunity…like Citadel buying E*Trade’s 3 billion debt exposure for 800 million…and step in to buy assets incredibly cheaply, JP Morgan-esque. I’m not saying that these will be American companies doing the buying…but our economy is so relatively vibrant, with so many long-term earning situations, such as those private homes in which people must live for 30+ years, and those skyscrapers and other office properties in which people live, that the financial markets will not collapse all the way, and we will continue to work, en masse, toward the 22nd century. Is that too optimistic? I don’t think so.

  10. I agree that the situation is somewhat dire…but I don’t advocate cutting and running. I recommend advocating that all work toward a solution…and just keep working until we get through the crisis. There are many deep, deep pockets that will see a downturn as an incredible buying opportunity…like Citadel buying E*Trade’s 3 billion debt exposure for 800 million…and step in to buy assets incredibly cheaply, JP Morgan-esque. I’m not saying that these will be American companies doing the buying…but our economy is so relatively vibrant, with so many long-term earning situations, such as those private homes in which people must live for 30+ years, and those skyscrapers and other office properties in which people live, that the financial markets will not collapse all the way, and we will continue to work, en masse, toward the 22nd century. Is that too optimistic? I don’t think so.

  11. Leave the country? Other than bankruptcy, do debts just disappear? Is there a “statute of limitations” on debt? I did not believe this exists.

  12. This is great advice, I’ve even known some ethically challenged people who’ve declared bankruptcy upon graduation from med school just to unload the debt. I personally feel there’s a spot in hell reserved and pre-paid for them, but for others this beats being an 80 year old greeter at Wal-mert with no health insurance.

  13. Am I missing something here?
    If you put your $110k into paying off your mortgage, does that money just evaporate? Unless your home price never recovers you should be able to get that money back. Granted in some areas the housing prices were so over the top it’s going to be a long time before they recover. Most places around the country it seems like a couple year offset is probably what’s going to happen.

  14. Leave the country? Other than bankruptcy, do debts just disappear? Is there a “statute of limitations” on debt? I did not believe this exists.

  15. This is great advice, I’ve even known some ethically challenged people who’ve declared bankruptcy upon graduation from med school just to unload the debt. I personally feel there’s a spot in hell reserved and pre-paid for them, but for others this beats being an 80 year old greeter at Wal-mert with no health insurance.

  16. Am I missing something here?
    If you put your $110k into paying off your mortgage, does that money just evaporate? Unless your home price never recovers you should be able to get that money back. Granted in some areas the housing prices were so over the top it’s going to be a long time before they recover. Most places around the country it seems like a couple year offset is probably what’s going to happen.

  17. Chris, thanks for the link to the fair debt info! I learned something from it. John

  18. Justin – sometimes it does evaporate.

    Example:

    You buy a house at 600K. You take out a mortgage for600K. You owe 600K.

    Next, the house price declines to300K. If you have paid 320K towards the mortgage but can only sell the house for300K, $20K has evaporated.

  19. bravo!

    after only being on the road for little over a month, we are looking to head out of the US of A…

  20. Chris, thanks for the link to the fair debt info! I learned something from it. John

  21. Justin – sometimes it does evaporate.

    Example:

    You buy a house at 600K. You take out a mortgage for600K. You owe 600K.

    Next, the house price declines to300K. If you have paid 320K towards the mortgage but can only sell the house for300K, $20K has evaporated.

  22. bravo!

    after only being on the road for little over a month, we are looking to head out of the US of A…

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