Warning: This is extremely long and will be in two lengthy parts.
Bad news first:
1. I really couldn’t bear his writing style. I felt like the formatting was like a transcript of a lecture. I’ve never heard him speak, but I don’t have to. I read enough of his book to know how he talks, what he emphasizes while speaking, and even the spots where he would probably be gesticulating or jumping up and down. It’s that obvious in his text.
2. I think in his examples, 10% rates of return are WAY TOO HIGH. I try to stay at a conservative 7-8% when calculating ROI (return on investment). Per Jeremy Siegel’s book, that’s about what the market makes and I’m not too itchy to beat the market in my calculations, lest I fall woefully short and end up in the poorhouse.
3. As much as he says 401k’s are great, he does not EVER say that it is possible to lose money in a 401k plan. These are investment vehicles that are not as safe as FDIC deposits. I think that’s a little irresponsible of a guy who’s supposedly passed a Series 7 exam. The other part of it is that he doesn’t warn you at all about crappy plan investment options. I’m staring at some right now and it’s enough to make me stop contributing to my 401k because I’m so close to losing money after inflation is factored in.
4. I didn’t like his IRA advice because he never factored in tax rates before and after you retire. You are most likely going to be in a lower tax bracket after retirement and that’s one of the main reasons why IRA’s are so useful. You’ll be sheltering your high bracket current income, and essentially moving it to a lower bracket. Example, say you are in the 33% bracket making $200K a year before retirement. After retirement, you make withdrawls equal to about $70K a year. You’ve just moved down two brackets to 25%. Of course, at the same time, you are gambling on future tax rates being somewhat static.
5. Listing contact information for companies in a book is a bad idea because you have to revise it all the time. So if you do get this book, try to get a newer edition. Some of the institutions in my library copy are gone due to mergers, so watch out if someone hands you their old copy. I suppose he added it so that there’s no excuse why you can’t start saving automatically, but keep it in mind if you want to call while the book is in your hand.
6. He promotes getting non-traditional low-downpayment mortgages, but doesn’t outline that in a seller’s market buyers holding FHA 3/97 loans get dinged. Those bids are often passed up for bids backed by 20/80 or even a 10/10/80 mortgage.
7. Like many personal finance and morgage books, (even the Miller book I endorse on the right) does not explain property tax re-assessments and how those effect your payment. I know I was hit with this because I grew up in a place that reassessed every 3 years. In VA, the entire state reassesses property every year. That means your property tax bill will skyrocket in a hot market. I don’t think his book, or any book I’ve read adequately tells people to factor this into their calcuations.
8. I like real numbers and like in point 7, a lot of personal finance and mortgage advice books don’t really use sample property tax rates, upkeep estimates, insurance premium estimates very well. I had no idea that I could insure my property for cheap. I always thought I couldn’t afford it even on my crappy salary. I have no idea what it costs to replace a window or a roof, or even re-tar the driveway. All that factors into whether or not you can afford a home.
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I have been pretty critical of Bach, especially since he went on his “if you don’t own a house now, you’re a loser” kick. Not right for everyone all the time. Good review so far. I’m planning on picking up his “homeowner” book, but don’t want to pay for it. Once the library has it or I find it used for under a few bucks, I’ll get it.
I have issues with your commentary:
1:
Can I just say that suggesting that people are going to lose money in a 401-k over the long term is amazingly irresponsible, and akin to suggesting people get meteor insurance? You are somehow suggesting that the theory of compounded growth over long periods does not hold. Are you sure that you have the info to make that call? I don’t think you do.
2:
10% is not too high. Since 1929, the S&P has returned 12% per year, 10% after inflation. You may suggest that past returns do not indicate future gains, but adjusting from 10% to 7% is completely arbitrary.
3. Tax rates are currently lower than they have ever been in the US. I mostlyish agree that you should factor future tax rates into the trad/Roth IRA discussion, but not mentioning this is careless. It’s also decidedly more likely that future tax rates will rise rather than fall, due to the SS & health care messes. Plus, medical expenses for someone up in the years will make your needed income much more variable than a young person’s.
Plus, your example of moving from $200k (at which rate, you can’t even contribute extra funds to a Roth IRA) to $70k at retirement would represent a huge lifestyle adjustment, and one that is probably fairly rare.
The rest of your points are fair.
Hi Overdog!
Thank you for your well reasoned remarks. But I would like point out a few things in rebuttal.
1. I say that he never says it’s possible to lose money in a 401k because that is a fact. It is possible and if you read the fine print on most fund prospecti it will say that returns are not guaranteed. So no, I’m not saying what you think I am saying. I am saying that he never fulfills his fiduciary responsibility under ERISA by warning his readers of the possibility of a loss, because it is indeed possible to lose money in a retirement plan. You’re right. It’s not likely, but I always mistrust financial advisors who only have an upside.
2. Have you heard of the theory that only successful stocks have survived to be analyzed? Many stocks have come and gone and there is a theory that says the current research on historical returns ignores the weak stocks that never made it. So sometimes, I think looking at ‘historical returns’ needs to be taken with a grain of salt.
Along with that, IIRC, Jeremy Siegel’s book, Stocks for the Long Run, says the market generally does about 8%, not 10%. But don’t quote me. I haven’t read that book in over ten years now. I personally shoot for 12% so that I have 8% post-tax gains. It’s not that arbitrary to plan for only an 8% return. I call it ‘conservative’.
3. I apologize for the unrealistic example of the $200K salary down to $70K, I just wanted to illustrate the point of incorporating tax planning into retirement planning. You are correct. It’s not very realistic is it?
I’m careless? I take issue with that since I’m a casual blogger. I’m not the financial guru telling thousands of people what to do. Shouldn’t Bach have been the one to mention tax rates in the first place? I’m just pointing out the oversight, albeit not in a manner to your liking.
Thanks for reading. I hope you liked the second follow up post about the good things I liked about the book.