Saturday, December 6, 2014

How Credit Cards Work: Billing Cycle and "Grace Period"

You may not think that credit cards are "complex or controversial", but you might be surprised to find that you don't quite know how credit card interest charges work, once you decide to carry even a small balance (e.g. pay anything less than that entire statement balance by the statement due date). I made this quick video demonstrate.

Tuesday, November 4, 2014

"My company offers an after-tax 401k. Should I contribute to it?"

I've spent a lot of time over the past few weeks educating myself on "after-tax 401(k)s." These are different than, and sub-optimal to traditional pre-tax 401(k)'s and IRAs as well as Roth 401k(s) and IRAs, which you should max out before considering contributions to an after-tax 401(k). To be clear: the topic of this post is "after-tax, non-Roth" 401(k)s.
The basic 401(k) salary deferral limit of $18,000 applies to pretax and Roth contributions. But there is a total contribution limit of $52,000 annually, which includes the $18,000 pretax or Roth contribution limit, employer matching contributions (which will probably not be more than $10,000), plus after-tax non-Roth contributions.[2016 numbers]. This means that more than $25,000 of after-tax 401k space may be available to you.
Unlike a Roth 401k, in which earnings are never taxed, earnings in an after-tax 401k will eventually be taxed at withdrawal at your marginal income tax rate. This will likely be higher than your long-term capital gains tax rate. For this reason many people would rather just invest in normal taxable accounts.
However, if you can quickly roll over your after-tax 401k contributions to a Roth IRA, any earnings it makes there are completely tax free. The IRS published an announcement in Sep 2014 (Source) that makes it easy to roll the contributions portion of an after-tax 401k into a Roth IRA, and the earnings portion in a traditional IRA.
For people that work at companies that allow in-service distributions (even with a short waiting period), or people that are planning to leave their company within a few years, an after-tax 401k may be an easy way to get a lot more money into a Roth IRA where it will continue to grow completely tax free, while only a small amount (the earnings) needs to be rolled over to a traditional IRA
See the following images which better explain the scenario:
I can take in-service distributions, or I will leave my company within a few yearsIn this situation, the after-tax 401(k) didn't accumulate much taxable "earnings" before I could roll it over into a Roth IRA where it will grow completely tax freeImage 1 
I will remain at my company for a long time still, and can't take in service distributionsIn this situation, my money spent a lot of time in the after-tax 401(k) gaining a substantial amount of earnings. When I withdraw the earnings (or roll them over to a traditional IRA and later withdraw it), I will owe my marginal income tax rate on it.Image 2 
Even if you cannot do in-service distributions and are not leaving your company very soon, there may be some people that would still benefit from after-tax 401(k)s instead of taxable investing. These are people that will have an extremely low marginal income tax rate in retirement (e.g. the Mad Fientist). Trading a 10% income tax instead of 0% LTCG tax on a big chunk of earnings may be a price worth paying to get a some more money into a Roth IRA above the annual contribution limit.

Friday, July 25, 2014

Are we alone in the Galaxy? Fossil Fuels as a possible "Great Filter" in answer to the Fermi Paradox

The Fermi Paradox and the "Great Filter"

If you aren't familiar with the Fermi Paradox, it goes something like this:

Assume Earth is a fairly typical planet orbiting a fairly typical but relatively young star. Billions of such planets exist in our galaxy, many of which should evolve life. Some fraction of these surely include intelligent life that attempts to travel between the stars. If we are only a few hundred years away from interstellar travel (more on this in a future blog post), surely some societies that have a billion-year head start on us should have gotten there first right? So "Where is everybody?" Why haven't we been obviously visited? Why don't we see intelligent radio signals coming from all over the galaxy? Why hasn't the entire galaxy been colonized (Given the fact that once interstellar travel is developed, exponential expansion would allow a society to do so in a "short" time)?

It's not really a paradox since there are plenty of reasonable answers to the apparent absence other intelligent life. Maybe we have been visited after all. Maybe they are out there, but just don't show it? Personally, it think it is most likely that they are not out there.

This response to the Fermi Paradox is called "The Great Filter." Maybe there is some thing in the process of life developing towards a space-faring society that acts as a statistical barrier, some event or chance that keeps life from getting to that point in almost all cases.

1. Are we special?

The great filter could be behind us. Maybe it was something like the development of a central nervous system, or the evolution of multi-cellular life, or the origin of life itself that is extremely rare. Intelligent life might truly be a one-in-a-trillion development.

2. Are we screwed?

Maybe it is something ahead of us, between our current state and a state of interstellar travel that is extremely rare. Might it be that most intelligent societies are unable to survive infighting and nuclear self-annihilation? What about extermination by disease, parasites, or predators? Maybe planetary disasters such as meteor strikes occur with such frequency that they kill off creatures before they can travel between the stars. This is bad news, because it means our species, like the thousands of other intelligent beings that evolved in our galaxy, is almost certainly doomed.

A Potential Answer

One of the many "filters" proposed is that intelligent civilizations tend to doom themselves through runaway greenhouse warming of their planet when consuming fossil fuels. (Not so intelligent after all eh? hopefully this is not a filter in our near future). I've rarely heard it proposed that the very presence of  fossil fuels in the first place could be a great filter. Think about how lucky homo sapiens are. We just happen to live on a planet where most of the dominant life forms are hundred-ton plants that take energy from the sun over dozens of years and concentrate it into this stuff called wood, which we can burn for an incredibly concentrated burst of energy. Even better, unique geologic processes take this plant matter and pressurize it underground over millions of years, transforming it into a black liquid with over 4 times the energy density of wood!

This black stuff took millions of years for the planet to produce, and there is certainly a limited amount of it. People argue whether our supply will last for hundreds more years or only a few dozen. But needless to say, our species probably has less than 1,000 years to wean ourselves off of this stuff. 

The red box below represents the 70,000 year history of modern humans. The black line at the end is the time during which we have taken advantage of oil and coal to fuel the rapid technological development of the last 200 years.

Even if we get another 1,000 years of use out of oil and coal, it will eventually run out. This is what such a history would look like:

We have the width of that little black line to figure out sustainable energy. We are part way there, but our progress towards sustainable energy still uses so much fossil fuel, whether it be mining for uranium, building wind turbines in huge factories, harvesting corn for ethanol with gas-guzzling combines, or pouring billions into fusion research. 

What if most planets don't have the luxury of even that little black line? What if most intelligent species don't evolve alongside something like trees? What if most intelligent species evolve under water where combustion is impossible? What if the process of converting biological matter into energy dense fossil fuels is absent? What if the fossil fuels are too far underground, and the intelligent species can't access it? A planet could have abundant radioactive fuel, high winds and accessible geothermal energy, but without fossil fuels bridging the gap and allowing the development of technology to access these other energy sources, they could remain completely inaccessible.

In future blog posts I will probably explore other possible answers to the Fermi paradox, and there are many. I picked a strange example of a "Great Filter" to discuss here, out of many options, in order to express my strong belief that 

Yes, we are probably alone in the Milky Way.