Retirement Planning

Spend vs. Invest – The Art of Money Accumulation

Tuesday, 09 June 2009 09:24

How a person spends money can be far more important than how he or she invests it. It is much easier to reach retirement goals by deciding how to live, rather than how to invest. Deciding what to do with the money we earn - how to spend it - is what brings about peace of mind, not how much we make or how much we have.

The late Loren Dunton, founder of the non-profit National Center for Financial Education in San Diego, wrote about his lifestyle decisions to buy new cars and spend weekends in Reno, instead of investing a hundred dollars each month in a mutual fund when he was in his late twenties. That fund would have been worth over a million dollars today.

An Expensive Car

Perhaps you think the difference between a full sized car, fully equipped, and a compact is only about $10,000. Actually, it is more like a million dollars. Consider this; borrowing $25,000 for a new car over four years will cost about $634 a month, while borrowing just $15,000 will cost only $381 a month.

If one saved the difference of $253 each month for 35 years, earning an 8% average rate of return, it would swell to $580,352. However, that is just the accumulation of the funds. What about the earnings as the funds are withdrawn during retirement?

If one were to get monthly payments of $4,479 from that sum from ages 65 to 90 (and some predictions say there may be over 250,000 people over the age of 100 in America in the 21st century), the total amount collected would be $1.3 million.

This is the magic of compound interest. However, it is not retroactive! One must save now to enjoy the benefits of compound interest in the future.

Waiting To Invest

For instance, if the difference in the example above were saved for only 25 years it would grow to just $240,000. Paid out at $1,857 a month, the total would be $557,000. It is amazing that the difference in saving an additional ten years is about a half million dollars. However, the monthly difference in payments of $2,622 monthly shows how today’s lifestyle decisions can be worth a million dollars in retirement years.

When should people begin saving money? Never soon enough. If ten years could mean a difference of $2,622 in retirement income each month, can you imagine what 15 or 20 additional years of savings would mean when you reach age 65?

Just A Little Postponement

For some, no doubt saving now would be easier if there was more current income. People 17 to 23 years old may think: “Me save? Are you kidding? I am just getting my education and besides I want to have a good time. When I get out of college and start my career, I’ll start saving.”

People 24 to 30 may be tempted to think: “You don’t expect me to save now? I have only been working a few years. Right now, it is important to dress well. I’ll save later.”

From 31 to 42, the reasoning may go something like this: “How can I save now? I am married with small children. Perhaps when they are older I can think about saving.”

Those 43 to 55 wish they could save now. However, many just do not, saying they cannot because of children in college and education loans to pay.

From 56 to 65 most recognize the urgency to begin saving now. However, money is tight. It is not easy for people that age to better themselves. It is tough to break years of over-spending habits. “Maybe something will turn up,” many say.

At age 65 and older, it is too late to begin saving money. You cannot save when there is no income. Many older people live with their children and are dependent on Social Security, which is inadequate, since Social Security was only designed to be supplemental.

If the choice between cars can impact retirement income, imagine the possibilities when applied to lifestyle choices such as a home, vacations, dining out, entertainment, wardrobes, furnishings, etc.

Try to develop the art of money accumulation now. Begin by saving every day. Start today!

Brock and Associates, LLC is a fee-based financial planning firm, specializing in financial planning, retirement, estate, and tax planning.

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How Pareto's Law Applies to Insurance Planning

Tuesday, 10 March 2009 08:49

You are probably familiar with Pareto’s Law.  It says, in effect, that almost everything in life somehow breaks down to an 80/20 ratio.  For example, 20% of the people accomplish 80% of the work, or that 20% of the people earn 80% of the money, and that losers outnumber winners by 4 to 1.

Vilfredo Pareto was an Italian economist who died in 1923.  More than sixty years later, we are finding ever-new applications of his “law” in modern economic circumstances.

No one really knows how Pareto’s Law holds up under scientific scrutiny.  However, we do know one place where it seemingly does have validity and that is in a mortality table.  We know, for example, that about 20% of males who reach adulthood will die before age 65 and the remaining 80%, of course, will die thereafter.

The only thing we do not know is which people are going to end up in that 20% category.  Not knowing into which group a person is destined to fall, makes it necessary to prepare for both the short term and long term problems.

Those who fall in the 80% category - who are going to make it to retirement age - have a more complex, but no less acute problem.

This larger group needs money for two reasons:

• To provide income during retirement years
• To provide for the inevitable event, death after age 65

They need to create an estate, conserve an estate or provide income to a surviving spouse.  In planning one’s estate, there are two kinds of death to contend with:

• Premature death (the 20% problem)
• Death somewhere around life expectancy (the 80% problem)

Term insurance can be a most effective way of solving the 20% problem.  Unfortunately, it is completely ineffectual in solving the death-at-life-expectancy problem.  Not only does the cost of term insurance become prohibitive over the years, worse yet, the coverage runs out.

Term insurance is actuarially calculated to expire about five years before the holder.  In New York, for example, term insurance is available only to age 70.  Just when the insured is getting ready to expire, the insurance company by law must take the coverage away.  To guarantee that term life insurance will be in force at death, no matter when it may occur, one had better make it a point to die before age 70!

Contrary to a popular misconception, life insurance companies make a lot of money on term insurance, because rarely are they at risk when the time for the pay-off of a death claim arrives.

In some states, a product called “Term to Age 100” is available.  Not only is this a most expensive form of term insurance, it is essentially a graded premium Whole Life contract without any of the inherent advantages of Whole Life, such as guaranteed cash values.

Application of Pareto's Law

How can one, with any degree of certainty, protect against both the 20% problem and the 80% problem and gain some important tax advantages along the way?  Well, that is precisely what permanent insurance is all about.

Financial advisors can now fashion life insurance policies that use both term (for high initial death benefit) and permanent (for cash accumulation and long term cost) elements at the same time.  The underlying investments (cash values) can be based on either an equity (variable) or fixed investment account.

The newest policies are children of the computer age.  Before cheap calculation was available, it was impractical to custom design a policy with precisely the death benefit, outlay and cash accumulation desired for each customer.  Now the consumer no longer must settle for a standard package, but may have a policy crafted for specific, personal needs.

In response to Pareto’s Law, it is now very easy to allocate 80% of the premium for the cash accumulation portion of an insurance policy, yet allow the 20% to pay for a full 80% of the death benefit!

Brock and Associates, LLC is a St. George, Utah based financial planning firm specializing in asset protection and generational wealth preservation.

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Senior Inflation is Increasing

Last Updated (Monday, 21 July 2008 09:55)
Written by Scott Slater

As you assess whether or not senior inflation is a topic that affects you, ask yourself these questions:

1. Are you a senior in perfect health?
2. Do you hate to travel?
3. Do like to live on very little food?
4. Are you a complete do-it-yourselfer?

If you answered yes to all of these questions, you should do just fine during retirement.  If however, you are like most of us, senior inflation can turn these into major concerns during retirement. Health costs, food, travel expenses, and day to day maintenance items are some of the major costs facing seniors in retirement. Food in the supermarkets has increased by 5.7% since last year, hospital services by 8.5%, nursing home care by 4.5%, and even funeral costs are up by 4.8% over last year.

Seniors should be very cautious when planning their retirements based on the published CPI index because it currently does not reflect what seniors are experiencing in retirement. To make matters worse, millions of baby boomers are beginning to enter into retirement.  This will add additional inflationary pressures on those goods and services that seniors need most.

Cost of living increases for pensions and social security are primarily based on the official CPI index and that index will not adequately keep seniors ahead of the costs that truly affect them. What is needed to keep seniors from experiencing problems later is to have an accurate and comprehensive plan that takes into account all the complexities that seniors will face. A good financial plan will give you a realistic view of what standard of living to expect during retirement, and how to minimize the devastating effect inflation has on seniors. “Senior inflation" should be of great concern, but professional planning and counseling can prevent a carefree retirement from turning into one of worry and stress.

Scott Slater is an Associate of Brock and Associates, LLC and specializes in meeting the unique needs of seniors through specialized retirement planning.

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