Retirement planning: A target fund for your 403(b)?

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Heating and cooling issues
2. Tax problems
3. Student loan debt juggling
4. Daylight Savings Time switch problems
5. Joint accounts with aging parents
6. Potential book selling scam
7. Multilingual children
8. Retirement planning: Roth vs. 403(b)
9. Salsa deal
10. Splurges

My children have a “dress-up tub” in the basement that contains a wide variety of costume clothes we’ve picked up here and there. Most of it is too big for them, but they can get the items on.

They tend to play with the “dress-up tub” a lot during the winter, but scarcely touch it during the summer because they’re outside so often. This weekend, they dumped it out for the first time in quite a while.

It’s almost as if a big session of the kids playing “dress-up” is an unofficial sign of the changing of the seasons.

Q1: Heating and cooling issues
I am having some problems getting my roommates to understand frugality, especially when it comes to the air conditioning/heating unit in our house. I am trying to research how much money it wastes to constantly have the air on, especially when it is only 75 degrees outside. My roommates believe that it costs more money to turn the air on and have it re-cool the house and insist it run constantly. I think that it is cheaper to turn it off when no one is home. What is cheaper?

Also, we have an upstairs and a downstairs and, therefore, two units. Sometimes when I wake up I find the downstairs has been on cool at 75 degrees all night while the upstairs has been on heat at 75 degrees all night. I feel like this cannot be good, but I can’t find any research to back up just how much money we are wasting or why this is bad. Is this a waste of money? Can you help me find some research on these things, so I can explain to them why I am so frustrated?
- Bill

It’s substantially cheaper to turn off the air conditioning and heating when you’re not at home. Why? If you’re constantly cooling or heating your home, you’re keeping the temperature of your house far away from the outside temperature, and basic thermodynamics says you’re going to lose the heat or the cool in your house faster if the temperature outside is far away from the temperature inside your house. That’s why your A/C runs a lot on a very hot day and not very much on a mildly hot day, and your furnace runs like mad on a very cold day.

However, if you don’t run the A/C or heat all day, the house temperature begins to approach the temperature outside, and the closer it gets to that temperature, the slower the rate of change is in the house. What that means is that at the end of the day when you have to use the furnace or A/C to “catch up,” you’re not going to have to run it nearly as long as the total time it would have to run to keep the temperature steady all day. It’s far better to “catch up” ten degrees at the end of the day than to “catch up” two degrees every single half hour.

As for the heat and air conditioning at the same time, that’s just a waste of energy. You’re far better off accepting that the basement and upper floor are going to be a few degrees different and just use one unit to manage the temperature of the house. My suggestion would be to just use the heat to keep the basement a few degrees cooler than you’d like, then not run anything upstairs. If it gets too warm, crack a window up there for a bit, then close it. Running two units is crazy just so you can have the exact same home temperature in the basement and the upper floor.

Q2: Tax problems
My husband and I got caught up in a dispute with our state’s department of revenue where we kept sending them verification that yes, he had paid his income taxes for 2009 on time, but they kept losing track of our paper work or never updated their records. It finally got settled after a year of going back and forth with them but not before they filed a tax lien against my husband. We did not find out about the lien until two months ago when my husband checked his credit report. It was quite a shock to us, and we immediately set about to get it taken off. The problem is that so far, the best we’ve been able to do is get it marked as paid, where in our eyes it should be removed. We’ve been told that even if it’s paid, a lien is horrible for your credit. We’ve been going round and round with the credit reporting companies and can’t seem to get anywhere with them. I want to try a few more things but am not optimistic they will work. I’m starting to wonder if we should get some legal help. My concern, however, is that I know it won’t come cheap and don’t know if it would be worth it. My husband wants to buy a car next year, so he will need his credit in good shape to do that. How do we figure out if it will be worth it? We don’t know my husband’s credit score right now (the lien is by far the worst thing on the report, so it shouldn’t be that bad but for the lien. His only debt is about $5,000 in student loans). Should we find it out and go from there? Thanks for any help!
- Lisa

My guess is that your credit score is still moderately good, but not great. If you’re really concerned, I’d get your credit score checked through a reputable organization. One approach you might take is to go to your local credit union and simply ask them if they have any credit checking services.

Getting something like this removed from your credit report is often more expensive than the benefit you’d get from having it removed.

As I’ve mentioned before, I consider the methods used in the United States to verify credit as completely ludicrous. There are so many situations like this one where one’s credit history does not reflect the reputability of the person, but more accurately reflects the (lack of) credibility of the institution reporting the credit issue.

Q3: Student loan debt juggling
A little background. I am a medical student and my wife is just out of nursing school, making about $80,000 with amazing insurance and a 5% 401k match. Our combined undergraduate debt is about $100,000 as she was solely focused on nursing school which landed her a great job, and I went to an expensive undergraduate school and worked full time as an EMT ($10/hr). No family contributions either way, but they were both well off and thus no aid outside of loans. My tuition now is $44,000 a year and of course I cannot work. There are not many med school scholarships for kids from middle class families, so it is basically all on loans. She is paying off both our undergrad loans and supporting us in every way.

I was recently approached by a company (a legitimate company) that offered to do all our taxes and handle all our repayment, i.e. tell us who to pay when, once residency starts. I don’t know if you are familiar with how it works, but basically I will graduate with $200,000 in medical school debt (plus undergrad that we hope will have a dent after 4 years of her paying it) and work as a resident for 7 years making about $50,000. This is nice because I will be working about 80hr/week and I don’t really have time to focus on the plans and percentages (though it is very significant with those large numbers). The company charges a flat $500/yr, and they help strategize your repayment, specifically focusing on income based repayment (as a resident, married, and wanting kids, that repayment will be close to $0) then after residency, if I took a job with a non-profit hospital, I would have my loans forgiven after 10 total years. They maximize, fill, and file our taxes too. This seems too good to be true, but there is a lot of testimony, and it takes advantage of a system really set up for people who took out $100,000 to get a social work degree and make $30,000 a year and can never repay that debt.

Do you know if there are dangers in taking out the maximal med school loan amount (which I don’t really need, since my wife pays for living expenses) and using that extra money to pay all our private loans (which are not covered by IBR and the 10 year forgiveness). Also, I feel weird saving money in IRA or 401k with all that debt, but this plan seems to encourage taking out the max, saving it, then having it all forgiven. I feel there is a moral dilemma. We currently max out both our IRAs and match the 401k. We also pay 25% of her take home for loan repayment, plus save for a future house. What are your thoughts on these companies that handle repayment strategies and specifically this 10 year forgiveness plan.
- Ron

I’ve heard of a lot of variations on plans like this. What these organizations do is essentially manage all of your money for you and either assign you some living stipend according to their formula or essentially give you a debit card to live off of while the rest of your income goes toward eliminating your debt.

These plans can work well, but you have to remember that they’re in business to make money. They’re not really doing anything that you couldn’t do yourself. You’re basically paying $500 a year for a service that will save you the effort in paying taxes and the effort in running a debt repayment plan.

I’m not clear on whether this forgiveness plan is tied to this company. There are a lot of student loan programs out there that are backed by government at some level that forgive student loans for people who take on high-risk jobs. It seems like this is just a service that is a “front end” to this kind of loan.

Again, it just sounds like you’re paying $5,000 over ten years to simplify your taxes and some of your money management. To me, that’s not worth it. It may be to you, though.

Q4: Daylight Savings Time switch problems
I have a terrible time adjusting to the switches to and from Daylight Savings Time. Do you have any tips that will help me not kill my productivity?
- James

Honestly, I just try to ignore the switch as much as I can. I try to keep my bedtimes and waking times in relation to sunrise and sunset rather than in accordance to the clock. The biggest trick there is just making sure that when the clocks shift, I’m not causing my children to be late for school or anything like that.

For me, it’s the change in day length that really causes difficulty. Day lengths vary about six hours over the course of a year here and during November, December, and January, the short days can get to me.

If you’re really finding the change rough, I suggest starting an exercise routine. Few things are better at improving and maintaining your energy level than regular physical activity.

Q5: Joint accounts with aging parents
I have read mixed reviews on the idea of adult children being added to their parents’ accounts. The issue often mentioned is the gift tax. But, the upside is that it is easier to make payments on behalf of the parent(s) in the event of illness or death.

What do you suggest? Are there any ground rules you would suggest like keeping the account below $13,000 to avoid gift tax issues? Does it need to be listed as an asset for a will since there are other siblings?
- Michelle

Money in that account would be considered part of the parental estate since the parent never relinquished control of it (because they kept their name on the account). Of course, any money you take from that account for your own use is considered a gift for tax purposes.

As long as anything that comes out of that account is clearly for your parents, there’s no issue at all with you being on the account. This is the type of thing that can be dug up in the case of an audit, so I’d take care with this regard.

When your parent passes on, don’t touch the account unless it’s explicitly for any remaining parental expenses. The rest of the money should be handled by the executor of the will.

Q6: Potential book selling scam
I need to buy some fairly expensive graduate school exam prep books online and the seller wants me to pay through PayPal. After we negotiated on the price a little bit, he asked if I could pay through personal check, money order or by direct deposit into his bank account to avoid the 3% PayPal fee. Is there a potential for scamming through giving an unknown seller a personal check/direct deposit/money order? 
- Kelly

Well, if you pay using that method, there’s no reason for him to send you the books if he’s going to scam you. Your only way to force him to send anything would be via small claims court.

The reason that services like Amazon Marketplace and eBay work well is that they offer protection against these kinds of scams. Paypal does as well, though it can sometimes have its own issues.

I would never pay someone I didn’t know without using some kind of buyer protection.

Q7: Multilingual children
Do you think there is any benefit to raising your children in a multilingual household? My mother-in-law speaks Punjabi and insists that our children speak it as well. Will this really help our children in any tangible way?
- Andrew

There are some studies that indicate that there are advantages in overall communication skills for children who learn multiple languages during their first few years of life. Not only that, a truly bilingual person tends to have great potential in job markets. I would think that someone who can freely speak both Punjabi and English would have many job opportunities, particularly if packaged with other skills.

That being said, how exactly would you go about teaching your child both languages? Are both you and your spouse bilingual? Do you communicate at home in both languages? If you’re not doing this – or, even worse, if you can’t do this – teaching your child two languages is going to be an extra challenge.

I think if you have the ability to easily teach your child multiple languages during their formative years, by all means do it. However, if doing so is going to add significant stress to your home situation, I’m not sure the benefits overshadow that.

Q8: Roth and 403(b) balancing
I’m 40 years old and finally got around to thinking about retirement savings a few years ago. Better late than never. I have a 403(b) plan to which my employer contributes 5% of my 70K salary. The plan lets me contribute essentially as much of my pre-tax income as I want to–all the way up to 75%. I was contributing 15% for a while but recently dialed it back to 5% so I can more quickly put together the emergency savings fund I’ve decided to create.

My question is about adding a Roth IRA to the mix and how to invest those funds. I have the 403(b) invested in a moderate growth fund through Vanguard but am thinking of changing that to a target retirement date fund. Should I invest the Roth IRA the same way, or is there a reason to invest one instrument more conservatively than the other? I have to admit that I’m pretty skeptical about the stock market and fairly pessimistic about our economy, but I’m willing to tolerate some risk and hope for the best over the long term.

Also, would you suggest that I try to max out my annual IRA contribution if possible, or should I focus instead on the 403(b) and just contribute to the IRA as my cash flow allows? Or somewhere in between?
- Ron

I think target retirement funds are a great way to plan for retirement. If you’re feeling more conservative, there’s no reason not to invest in a target retirement fund that targets a date earlier than your retirement date.

I see no reason why you couldn’t put both your IRA and your 403(b) into a target retirement fund. You could have one target an earlier date and another target a later date.

As for balancing the two, I would make sure I got every drop of matching money from my employer in that 403(b) before looking at a Roth. If you have all of the matching money already and are looking to save more, I’d put everything into a Roth until I maxed it out, and if I had still more, I’d go back to the 403(b).

Q9: Salsa deal
My wife laughed at me when I mentioned the article on salsa. She found a coupon deal and got 10 bottles of Chi-Chi’s brand salsa for free. She is the queen of the deal.
- Joe

Such deals can be found, but how much effort are you putting into deal seeking? Also, how many of those jars will actually be used before their expiration date?

My experience with such deal-hunting has been that there’s a lot of serendipity involved. If you spend a lot of time digging, sometimes you’ll find nothing at all. Other times, you’ll find a great deal like this salsa one.

For me, it’s not worth it to trawl coupon resources for an hour to save $5 on my grocery bill. I’ll do a quick pass to find coupons that match my grocery list, but finding great deals for the sake of finding great deals never pans out for me over the long haul.

Q10: Splurges
What do YOU splurge on?
- Emma

My biggest two splurges are board/card games and books. Those are pretty much the only things I splurge on at this point. I guess I do splurge on very nice gifts for my wife and my parents at appropriate occasions. I used to splurge on video games, but I’ve only bought one game for myself this year, so I think that’s not really a splurge at this point.

Once a year, I go to a gaming convention with a few friends. I usually save up for this over a period of months. I consider that to be something of a splurge.

I really don’t do any impulse buys that I can think of, though. I’m the type of person who will sometimes put “breath freshening gum” on my grocery list, but without an item like that on the list, I won’t buy gum in the checkout aisle.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.