HOW LONG WILL MY MONEY LAST ?Written by Peter F. Baigent CFP, CLU, CHFC, RFP.
First Published in Balanced Report Fall 1991 This is central question of retirement planning. When people come to see us, that is what they are asking us to answer for them. The question is usually phrased as. "Can I afford to retire? When can I afford to retire? How much income will I have at retirement? Will inflation cause me to have to work longer or reduce my standard of living?" Very simply you want to know, will you have enough. This is no different than planning a trip. You need to try to figure how much money you need. How much cash / travelers cheques, will you need for journey? When you have figured that out you will probably still take along some credit cards just in case you miscalculated. We feel more comfortable with a safety cushion in case we run out of money. At retirement most people want to know that their pensions and investment portfolio will provide an adequate income. Their capital is their safety cushion and they usually prefer to leave it intact. The difference between retirement and a vacation is that you don't have to worry about price of your purchases increasing between beginning of your vacation and end of it. But, you sure do in retirement. If you spend too much on your vacation you can always earn more to pay for it. In retirement you are unable to earn more income, in most cases. A person retiring today at 65 years of age can expect to live an average of 22 years, or age 87 based on current mortality tables. This is one third of your life and figure is improving all time. With that length of time in retirement, perhaps longer if you retire earlier, inflation becomes a serious matter to consider. At 5% inflation it will take three times as much monthly income in twenty two years to provide same purchasing power it did year you retired. In order to answer question how long will my money last it now becomes a little more complicated as we need to factor in an assumed rate of inflation. Most Financial Planners that I talk to like to use a figure of 5% in their forecasts. Any assumption under 4% is in my opinion irresponsible. Over a long period of time such as retirement, you can expect that some periods will be higher than others but it will level out over time. It is my experience that many people will experience a fair amount of inflation in their expenditures in early years of retirement. This is because they are now traveling more or making a major purchase such as recreational vehicle or equipment to enjoy their retirement. But as they get over 80 years of age they start to spend less. So inflation of expenses is greater in first ten yours of retirement and less after.
| | Ben Franklin Didn't Quite Get it RightWritten by Terry Mitchell
When Ben Franklin said "a penny saved is a penny earned", he didn't quite get it right. Actually, a penny saved is worth more than a penny earned. Do you find this statement shocking? I am about to prove to you that what I'm saying is true. Most people erroneously believe best way to strengthen their financial health is to increase their income. On contrary, saving money by cutting costs will get you there quicker. You see, it's very simple. When your income increases (with some exceptions like part of it you put into your 401k), that extra money is taxed. On other hand, any amount you save by cutting costs is not taxed. Therefore, $20 saved by cutting costs is worth more than a $20 increase in income. The following (although over-simplified) example will illustrate this principle. Let's suppose that Jack and Cindy have identical jobs and incomes. Let's also suppose
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