Highlights from the Dave Ramsey Show

Question: Rich in New York owns two homes. One is paid off, and they owe $250,000 on the second. He wants to know if they should rent or sell the paid-off home to get rid of the mortgage in preparation for retirement. Dave tries to determine if it would be a good rental.

Answer: I would either sell the weekend house or I would pay off your main house. If you are unwilling to pay off your main house because that takes your cash too low to suit you, that means you're not wealthy enough to have a weekend house. I would write a check today and pay that house off. You have the cash to do that.

You have a great income and you have the cash, and I'd choose to be debt-free. And when you get ready to retire, you're going to move to the weekend house and decide if you want to keep it as a rental property or not. Ask yourself if it's a good rental or would you be better off to sell that house and buy a couple of rentals that are smaller properties and thus better rentals than larger properties, typically.

High-end luxury homes are not always your best rentals. You can look at that, but you don't have to make that decision now. In the meantime, though, I would pay it off.

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Question: Dave explains to Byron why converting a 401(k), which has $6,300 in it, to a Roth IRA is a good plan.

Answer: You don't cash it out. Do a direct transfer rollover with the broker that has your Roth IRA to a traditional IRA. If you have an extra couple thousand dollars, I would convert it to a Roth IRA when you do that. By doing that, you'll need the extra couple thousand dollars to pay the taxes created by that. Roll it to a traditional IRA by direct transfer.

What that means is when you're rolling a 401(k), you don't want the company you're leaving to give you a check. If they give you one, they are required to withhold 20%. Let's say you had a big 401(k) with $100,000 in it. They withhold $20,000, so you have $80,000 in your hand, but you are required to put $100,000 into the new IRA that you open up within 60 days. Only you don't have $100,000, you have $80,000 because they withheld $20,000.

You've gotten yourself into a situation where you've made an accidental withdrawal on your IRA or your 401(k) and get penalized and didn't mean to. The way to avoid that is with a direct transfer rollover. What that means is you go to your broker, or an investing ELP on our website, and pick out the mutual fund that you want to put your new IRA into, that you're moving your 401(k) money into.

You select the mutual fund, fill out all the paperwork, sign everything, and you do not have to give the broker a check. One of those forms you fill out is a direct transfer form. That form is then sent to the administrator of your 401(k), and they send the money, without withholding a dime, directly to the IRA. They are not required to withhold when it's a direct transfer.

It keeps you from getting in a cash-flow bind when you are doing an IRA rollover. Do a direct transfer rollover. That's definitely your best route to go on that, and I'd pick a good mutual fund.

Now once you've got it there, if you want to convert it to a Roth IRA, I would since you're on Baby Step 3. If you can scratch together a couple thousand bucks, which would be about your taxes on $6,300, and be ready for your tax bill next spring when you file your taxes because you've converted a traditional IRA to a Roth IRA.

The beauty of that is that you have $6,300 growing tax free, not tax deferred. That's a big hairy deal later. If you convert that $6,300 to a Roth IRA and you're 30 years old, and the mutual fund averages 12 percent growth, that money will grow to $747,000 by the time you're 70 years old.

If it's in a traditional IRA because it wasn't converted to a Roth IRA, he pays taxes on that entire amount as he takes it out at retirement. If the tax bill is a third of that amount, that means about $250,000 of it will go toward taxes. Or, he can pay $2,000 now and leave the entire $6,300 in there, it still grows to $750,000 and has no taxes on it.

This little move turns into three quarters of a million dollars tax free and costs him $2,000 out of pocket. This is what we call in finance the time value of money. Would you rather have $5,000 today or $750,000 at retirement? It's about the same thing. That's what that money is worth if you invest it. That's what it becomes. That's what you've got to think about.

Rich people think about these kinds of formulas. They think about things like how $100 a month invested from age 25 to 65 in a decent growth stock mutual fund in a Roth IRA equals $1,176,000. That's $100 a month during your working lifetime to retire a millionaire. You don't just retire okay or eke by on Social Insecurity, which isn't even enough to support your life and was never designed to be a retirement program that supported you. It was designed to be a supplement at best, and that's all it is at best.

You can't live on Social Security and if you do, you're not living much of a life. A hundred dollars a month makes you a millionaire. I would submit to you that you will have some down times and hard times over your life, but you'll also have times when you're prosperous. And if you will start investing, you almost always make enough to save $100 if you just don't buy the super-duper premium cable package. Or if you buy a car that doesn't have a car payment. If you don't consume everything you make and you learn to do what rich people do.

They understand that over time, money seriously grows if you continually do it and continually save it. Just $100 becomes $1,176,000. I could go off for 10 minutes about how no one in America should retire and not be a millionaire. Everyone should retire a millionaire. Isn't that ridiculous?

But in today's culture, we are being politically taught to resent success. The president calls it shared prosperity; and you have to have prosperity in order to share it. Isn't that interesting? You would have it if you changed your actions instead of waiting on him to fix your life. There is no time when a government program does that for you. But when you do it for you, $100 a month makes you a millionaire.

If you think you're old and it's too late for you, that just means you have to put in more than $100. It's not too late for you as long as you're sucking wind. You can still make positive choices starting today. Ready, set, go.

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Question: Julie in Boise and her husband have had some recent income changes, and they have nice retirement accounts. However, due to the income changes, Julie is uncomfortable with loosening up the purse strings. Dave doesn't like the idea of Julie's husband doing nothing at 52 years old.

Dave Ramsey's advice: In 20 years, your $700,000 in retirement is going to be about $7 million if you don't touch it and if it continues to grow, assuming you've invested well. You'd be 60, and he'd be 70. It might be $6 million. It might be $5 million. The $700,000 in 20 years would grow to that if you add nothing to it and it's invested in good growth stock mutual funds, based on the past averages. If you don't touch that money and you only live on your income or less, then you should be okay when you get in your 60s and he's in his 70s, but you're going to have to create income until then. Those are your numbers.

I'll just be honest with you. I can endorse what you're doing; I can't endorse what he's doing. He's underperforming in his 50s. He could go and do a lot of things. I'm not suggesting he kill himself and work 100-hour weeks or be desperate or crazy or anything, but to not fully apply yourself at any point in your life is not something I can endorse. Fifty-two years old and doing nothing or virtually nothing is not impressive to me. I'm 51. I work a lot. I don't need to work, but I have found work that matters. I help people in a lot of different ways—our company does. I enjoy the challenge of the marketplace, the challenge of being here on the air, the challenge of being on stage speaking, the challenge of leading and growing a company. I just can't relate to that, and I don't think it's very fulfilling for him being quasi Mr. Mom in this situation. I would challenge him to find something to apply himself to and find some way to serve. Service is ultimately where you get your joy. I think he's going to get real bored and real cranky when he does or he's a lazy person—one of the two. I don't know which. It doesn't sound appealing to me.

I'm probably on the other end of the spectrum in that I have no plans for retirement. I'll just die. I'll be doing something all the time. I won't necessarily be running the whole business, but I don't intend to quit. My friend Zig Ziglar is in his 80s, and even after a head injury, he's still out there with Julie and Tom doing stuff—not because he has to. He certainly doesn't. There is a thrill that comes from serving. There's a joy that comes from serving and helping and doing something for others. This idea that I'm going to kick back and put my feet up is not how we're wired as people.

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