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Retirement Can be Like a Rose, Depending on How You Hold It

A rose is beautiful and we all enjoy them to celebrate special occasions.  But roses have thorns — sometimes we can prick ourselves if we aren’t careful.  Retirement is just the same.  We can enjoy retirement if we hold it just right, but if we refuse to prepare, the thorns we will experience in retirement can cause some real pain.

Here are some of those thorns to consider:

  • Of all people who filed bankruptcy in 1991, 21% were older than age 65. Today that number has grown to 28%.  This destroys credit and prevents ability to borrow money for needed items. If debt levels are really high before retirement age, this can be a real thorn to manage after age 65.
  • Some parents try to help their children with student loans by co-signing on federally insured loans. Later, if the child doesn’t get employment that earns enough money, the parents end up paying on the loan.  This can be a real thorn when it comes to retirement.
  • Another potential thorn in retirement is higher taxes. No doubt you have been taught to save money in a 401(k) or other tax-deferred savings program throughout your working years. Supposedly you will be in a lower tax bracket in retirement years so paying all those deferred taxes in retirement will be cheaper than paying them during working years. But it has been my experience working with thousands of clients that this simply isn’t the case. People in retirement usually pay much  higher income tax than when working because they don’t have any deductions!
  • Another thorn that can cause real pain in retirement is waiting too long to start saving for it.  If you started working at age 25 but did not form a habit of saving until age 55, this could potentially pain you every day of your life in retirement.
  • Having to work until age 80, because you don’t have enough money to retire, can be another real problem.  Maybe you like to work and you don’t mind it. But that’s different from being forced to work. And what if you don’t have the health to do so?
  • What about the fear of running out of money in retirement, which oddly enough, is a much greater fear than dying? I’m sure the reason is that it’s hard to cut spending down at a time we have more free time to spend.  Statistics show we spend more when we first retire than when working.  Apparently it takes a few years to adjust to the new income.
  • The thorn of inflation is real.  It has hurt so many retirement-aged people as their fixed expenses increase while their income does not.
  • The final thorn that can turn a beautiful retirement into a thorny nightmare is the need for dental, vision, hearing and for long-term or hospice care.  The huge prick here is that the costs can exceed your entire savings for retirement, and this might leave a surviving spouse destitute and on welfare.  A HealthView Services study in 2016 shows that the cost for all these elderly care service for a couple age 65+ will be $377,000 during their retirement.

To create a beautiful retirement with minimal thorns, get in touch with a financial coach who can teach you how to deal with each of the things I have discussed above. Contact me today: peter@moneymastery.com.

The Four C’s of Retirement Planning…

Recently I was sitting in a retirement income training class and the four C’s of retirement planning were presented that just made good sense.  I have changed the details a little so that they fit the Money Mastery Principles and philosophy, but here you go:

First C:  Clarity of thought and action is the first strategy to begin building a predictable retirement income.  I ask these questions of the clients I coach and would like you to answer them as well:

  1. How much income will you need in retirement?
  2. How many years might you live in retirement?
  3. What resources do you have to fund your retirement?
  4. What is your risk tolerance?
  5. Do you plan to leave any assets to your beneficiary?

Second C: Comfort during retirement is a big concern.  Imagine for one minute that you are retired and that Monday arrives and you act like it is Saturday.  Tuesday is tomorrow and you act like it is Saturday, and so forth.  When you are retired everyday is like Saturday and we spend like we do on Saturday.  That is why we tend to spend more money in retirement than when we are working.  It is important to consider what kind of comfort you want in retirement so you are more cautious now during working years and not spend everything we make. 

Third C:  Cost of living is another big strategy to plan for and manage.  Health care costs will be the largest expense in retirement that you must prepare for. These expenses will be well beyond what you spend for food, transportation or living expenses.  In addition, inflation can slowly sneak into your pocket book and erode 20 to 30% of you purchasing power.  Be aware and make sure you are doing something to manage this creepy crawler.

Fourth C:  Certainty of income at a time we can not afford to run out of money.  Though you worked for 40 years, it is entirely possible that you will live 20 and 30 years more in retirement.  Market risks can be a huge drain if you are trying to make money last longer by investing more money, which adds more risks and chance of loss.

These 4 C’s are strategies that must be addressed for you to be at peace when arriving at retirement.  I have lots of great experience and advice with how to deal with these 4 C’s and am happy to share them with you: peter@moneymastery.com. 

Inflation is a Sickness, Making You Weaker…

Ronald Reagan said in 1982:

“Inflation is a virus in the economic bloodstream, sometimes dormant and sometimes active, but leaving the patient weaker after every new attack.” 

Much is said about inflation, but no one seems to know exactly what the rate of inflation is, so I thought I’d just clarify:

The rate of inflation for the last 35 years has been 4.07%. 

What does this mean for you? 

Well, for you to stay even with your living costs, you must double your income every 18 years. Are you prepared to do that? If the average couple reaching age 65 will have one spouse who will still be alive at age 94, that Screen shot 2016-07-14 at 2.56.32 PMmeans that they will have lived 30 years after they retired, but more than likely on a fixed income. How will that person deal with an almost 5 percent inflation rate (and possibly higher) for 30 years? Living longer allows inflation to creep in and disrupt all your income plans.  

I hope you will feel comfortable contacting me for a no-cost discussion about your personal finances. Call or email me:  (801) 292-1099,  peter@moneymastery.com.  In that conversation I can talk to you personally about your spending and borrowing habits and help you learn how to immediately get in control of both of them.  If you’re not ready to talk to me just yet, you can learn more about what I teach by visiting www.moneymastery.com.

What if 2017 were the year that you could obtain all the following?

  1. Create a spending plan that helped you get in control of your spending within one month.
  2. Find an extra $300 you have been wasting that can be applied to debt and savings?
  3. Create a debt elimination plan that will have you out of all consumer debt within 1 to 3 years and your mortgage within 10?
  4. Start saving at least 1 percent of your income every month for emergencies and for emotional needs.
  5. Stop arguing with your partner about money and putting the fun back in your family life.

You can do all of this in 2017, which will be very empowering and get you on the road to actually creating a cash surplus that will allow you to have a wonderful retirement while staying ahead of inflation.  Commit to getting on track today!

What You Don’t Know about Inflation Can Really Hurt You…

The following graph shows the impact of inflation on your purchasing power over the last 100 years.

inflation

Should you worry about this? 

YES!

If you had been retired 10 years and the following expenses all increased significantly, how would you adjust for losing one-eighth of your money?   These price changes are real.  This happens all across the nation and the graph above shows what your dollar will buy now versus so many years ago.

  • Medical costs have gone up by $112 a month
  • Auto insurance increased by $89 a month
  • Food costs have gone up by $223 a month
  • Gasoline costs have gone from $76 a month to $132.

This is the same effect as if your monthly income went from $3,400 a month down to $2,900 a month. That’s a huge pay cut!

The big question is how can you adjust your spending to make this work?  Inflation is here to stay.  We must learn how to own assets that keep up with inflation.  We must have income sources designed to adjust upwards.  It takes planning, for many years in advance, to have assets that will go up in value as your expenses increase.  Your task is to search out these kind of assets that will go up during inflationary periods but not go down in deflationary times.  I will add more “how to” in the near future that will meet this criterion but you are the one that must take the initiative to learn more about this.  For further help, go to www.moneymastery.com.  I encourage you to make it a habit to study and use search engines and social media and referrals to find our ways to invest that will increase in value and income over the next several years.  You can do this.  Give me your success stories when they happen. peter@moneymastery.com.

Over the Long-haul the Stock Market Always Goes Up, Right?

We have all heard the statement many times, over many years, that even if the stock market takes a dive, it always goes up again.  The following graph, which plots the ups and downs of the stock market over a 100-year period seems to support this oft-repeated claim:

historical-rate-of-return-1900-2000-1024x576

This illustration shows the market going up, experiencing some downs, then going up again and up some more, again.  Look at this growth!  It seems to prove the idea that the market always goes up.   However, your experience with the stock market would have been far different than what is illustrated in this graph if you had invested in the market in 1929, the year the stock market took the terrible crash that started the Great Depression. And you probably didn’t have money invested in 1943, or in 1975, either. But if you invested during any of these times, the market certainly wasn’t making tremendous gains and thus you would have had a hard time recovering any money you lost during a major downturn.

Now take a look at this same graph, which I have modified with hand-drawn lines indicating five periods when the market either took a dive or stayed the same, not making any gains:

 

dow-jones-graph

If you had money invested during timeline “C,”  for instance, from 1929 until about 1955, a 26-year period, you would not have started to recover from everything you lost until 1955. That’s 26 years — more than half a working person’s life! This means it would not be likely that you would have had time to recoup any of your losses because during that long 26-year period, the market did not got up to the same level it had been before. Of course we don’t know what will happen to the market in the next two decades, but if your history matches any one of these five periods (A through E) on this graph, you will not grow your money.  Plus, inflation will erode your savings so that you will not only not earn any gains, but you may end up in the red!  Those who say the market always goes up also encourage you to invest in the stock market to solve the problem of inflation.  They say the market has averaged 10 percent growth and will always keep ahead of inflation.  But unfortunately, this isn’t the way it has worked out.  The graph looks good over a 100-year period, but you won’t be working and trying to accumulate savings and investments over 100 years. It doesn’t look so hot when you pick a 20- or 30-year period of time.

If you are planning to keep your money invested over the long-haul using the standard philosophy of “the market will always go up,” the odds are you will fail miserably.   Don’t you think 100 years is a long enough period of time to establish a trend?  Maybe not, but I think so.

Here’s my warning:  The market does not always go up during a shorter 20- or 30-year period and it’s those shorter periods that have the most personal impact for you.  We work and invest for 20 or 30 years then retire.  You don’t invest for 100 years.  Where will your money be on this graph over the next 1o or 2o years?  Will it always go up?  Don’t count on it — you take big risks with retirement funds by putting them all in the market.

Learn where to invest so you don’t lose money, keep ahead of inflation, reduce taxes, get a good growth and predict a strong income at retirement.  Contact me for help: peter@moneymastery.com or go to www.moneymastery.com.

What the Risk of Inflation Means to Your Retirement Fund

In the past few posts, I have been talking in detail about the five risks to your retirement that you must deal with now if you want to have a healthy retirement later. Inflation is another major risk to your retirement but most people don’t really give it too much thought. 

What is inflation? Investopedia (2016) defines it as this:

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.

There are more classical and older definitions of inflation, which include the idea of measuring the rate of the money supply. As governments continue to manipulate money markets in their favor, they expand or contract the amount of money in circulation, thus the idea of “measuring” the money supply. For example, if all the money in circulation was represented by X, and the government printed 30 percent more of X, that would mean the money supply was inflated by 30 percent. The symptoms of this would typically be rising prices to buy the same goods, which means your money is worth less and doesn’t go as far to provide you with your needs.

What that means to you as a retiring consumer is this:

Let’s suppose you retired with $500,000 in your retirement account; let’s also suppose you needed $50,000 to cover all your expenses in a year, which would be about average. But, if the money supply is inflated by 30 percent and costs therefore go up by 30 percent, that means next year, you would need $65,000 to cover all your expenses.

Inflation is a silent thief. Most governments use it to pay deficits and debt because it ends up costing them less, and most people don’t feel it, even if they are for sure being affected by it. Henry Hazlitt said:

 

screen-shot-2016-10-12-at-3-22-53-pm

 

The long term effects of inflation are devastating to a nation’s economy, and once it begins it is difficult, if not impossible to stop. You can see the effects of inflation on the US dollar in the following graph:

screen-shot-2016-10-12-at-3-24-56-pm

So, while this is a snapshot of how inflation affects the entire economy, think of the effects inflation has on you personally and your retirement! If you don’t have income that continues to grow each year, without depleting your current retirement accounts, you are going to end up running out of money.  For exciting ways to create a predictable retirement you cannot outlive, regardless of inflation risk, contact me:  peter@moneymastery.com.

 

Clearing Up “Fuzzy Math” Used by Investment Market

 

QUESTION:  What is the average rate of return when you make 100 percent on your money year-one, but then lose 50 percent in year two?  

ANSWER:  The investment industry will tell you 25 percent.  

Wall Street has been using what I call this “fuzzy” math for at least 80 years!  If you were to attend an annual meeting with your 401(k) investment adviser, they always use this fuzzy math to prove to you by numbers what you have averaged.  These advisers will repeat, over and over again, that the average return in the market has been 11.9 percent over the last 40 years. Mathematically this is correct, this is how the numbers play out when you calculate them for yourself, which I have done. However, when you place your money in that stream of returns, you must take into consideration both the ups and downs. When y0u do, you will see that you will net 3.8 percent cash-on-cash. Go ahead, I urge you, to do the calculations for yourself and prove this out.  If you feel like you have been lied to, join the club. While the math is correct that they use to advertise their products, this isn’t really how the money follows along.

Fuzzy math is deceptive because it does not tell the whole story.  The argument for investing in the market is to keep ahead of inflation because you will “average” 11.9 percent, but there are so many other things to take into consideration besides this sparkly 11.9 percent figure.   You need to be aware that placing your savings into the market is not always what you think it is. To learn more about honest methods for really putting money in motion to make a whole bunch more, contact me:  peter@moneymastery.com.

 

Inflation Eats You Alive Financially, In More Ways Than You Think…

When I was a teenager, gasoline prices were never a concern to me.  Gas was 27 cents per gallon and my old car got eight miles to the gallon.  This “27-cent-cost” wasn’t a problem because I never traveled more than three miles anywhere I went, whether to school, my part-time job, or fishing.

Be we all know what gasoline costs are today.  They have been as high as $4.75 per gallon and now so many people commute to work with average distance of 25 miles in one direction.  This cost is part of our daily discussion because we are traveling so much further as we go to work or school.

And what about medical costs? In 1966 the average daily hospital stay was $28 per day.  Today the average is $2,800.  This is 100 times higher than in 1966… Not 10 times but 100 times more!  This equates to an average annual increase in hospital costs of 9 percent each and every year for the last 50 years!!  This is called inflation. I’ll wager that your income probably hasn’t gone up 9 percent a year!

Consider food, housing, transportation, and clothing costs along with gasoline and hospital costs, and inflation is a big, ugly monster of a problem.

How does this relate to you personally? 

When you get a raise and you feel rewarded with more income, GiveBackremember, that increase is just keeping you even with inflation… in a sense there is no real increase unless you have been given a phenomenal raise.

And what about taxes? Examine your tax bracket and see that as your income increases, so do your taxes.  The U.S. graduating tax system is designed to go up as you make more money.  So when inflation increases, this forces employers to keep up with inflation and now you have greater taxes to pay.  In other words, the government gets more of your money as inflation occurs.  The government doesn’t have to announce a tax increase, they just have to print more money for gasoline, hospital care, food, housing, transportation and clothing to increase.  We all get so used to this system, we don’t even think about it.

What is the solution?  What can you do to keep this from happening to you?  It does not appear that our government is going to quit spending more money than they have any time soon.  They have been doing this so long they forgot what a surplus looks like.  The only solution I can think of, beside you making more money, is to control your spending and not be like the government.  Save money into long-term accounts that will give you tax-free growth. There is hope.  I have lots of solutions I’d be glad to discuss with you:  peter@moneymastery.com.

Understanding Retirement Risks: Inflation and Its Ugly Components

Inflation is a quiet thief, as in the night.  

When a person turns on income to retire, most often the amount that will be paid for life is locked in from that moment on.  As inflation increases, income value, in effect goes down, down, down.

This kind of risk is hard to combat.  For example, think of the tax brackets that determine what you pay on your income.  As inflation goes up, wages do also.  So the IRS automatically gets more income tax from everyone, including those using retirement income. This increase has become so common, that everyone just accepts it — or in other words, everyone just lays down and takes it on the chin.

Inflation is tracked by the government through the CPI or Consumer Price Index. A basket of goods is selected and compared against prices each year to determine if inflation exists or not.  So a 2 percent CPI means all the goods placed in the basket went up on average 2 percent.ConsumerPriceIndex The assumption to be made from this is that all prices went up 2 percent or more.

But, what if I track my own basket of goods and use 30 items instead of 8?  And what if I don’t change the goods in my basket like the government does year after year, so I get a more accurate picture of these increases over time?  It is isn’t hard to track the cost of one gallon of milk, or tuition at the college my child goes to.  It’s not hard to track the membership fees I pay to my recreation center, or the cost of my favorite tennis shoes.  Once you do your own tracking, which I have done many times, you will realize like I did that the CPI is very subjective and not very accurate. Your own tracking will inspire you to learn what you can do to keep up with inflation, especially when it comes to retirement income, which, as I mentioned at the beginning of this post is sort of “set” at the point in which you turn it on.

Here are a list of things you can do to combat inflation as it relates to retirement income:

  • Start a small business to make more money and pay for increasing costs. You may scoff at this idea, but many of my clients have been able to stay on top of rising costs during retirement by operating a small business out of their home based on an activity they enjoy doing. They make a little extra money and enjoy some real tax savings as well. That’s because small businesses create many more deductions on Schedule C than retirement income. Note: be sure you are running your business as a viable venture and not as a hobby or the IRS will not allow such deductions. Learn more by reading MONEY:  What Financial “Experts” Will Never Tell You (amazon.com).
  • Arrange your retirement money to be “indexed” to market increases.
  • Own real estate such as a rental duplex or small apartment complex (even a basement apartment); the rent you collect can increase with inflation, thus helping you keep up with rising costs. 
  • Consider moving to a more rural area; inflation is worse in larger metropolitan areas.  The best way to do this is through Internet searches for communities that require less money to live than your own. I did this last year and found that an income of $100,000 living in San Francisco, California is equal to $43,000 living in Cedar City, Utah.  And what would that $43,000 living in rural Utah be worth in an even more rural setting, such as Costa Rica? Having traveled to Costa Rica and discussing this with several people from the United States who live there, my estimate would be about $15,000 a year, as compared to $100,000 living in California.  It does make a big difference where you live.

In retirement it is important that you don’t ignore the elephant in the room, i.e., inflation. It is a problem and you need to keep your eyes open to the real costs for you and find solutions that can counter increasing living costs as much as you can. Unfortunately, inflation is here to stay. Be sure you study it and plan around it, or inflation will silently decrease your purchasing power in your retirement years.

Filling Your Buckets Appropriately for Retirement

When I am explaining retirement planning to my clients, I like to use the analogy of buckets to help people visualize what they need to do to prepare the most appropriately for retirement.

Think of retirement planning in this way:

There are five financial buckets a person needs to use, in a specific order, to achieve optimum financial success:

  1. Income
  2. Inflation
  3. Liquidity
  4. Long-term Care
  5. Legacy

 

Bucket 1 – INCOME:  With whatever amount of money you have gathered over your working career, the first task is to lock down a guaranteed income you cannot outlive.  I know there are many issues, but if you have a guaranteed income it solves most other problems.

Bucket 2 – INFLATION:  There is an inflation index called CPI, which graphs how living expenses have increased over the years.  But what is “real” inflation?  I have kept track of my expenses for several decades.  I can refer back to cancelled checks and receipts showing what I paid for living expenses in 1979.  For example, I can tell you what I paid for a postage stamp.  My calculations show that inflation has been twice what the CPI tells me.  Do this for yourself.Buckets  Keep track of what you pay for gasoline, food, utilities, taxes and so forth each year.  Refer to your past tax records.  Learn what life is really costing you and learn how to keep ahead. Without securing Bucket 1, you will not have anything to keep up with inflation.

Bucket 3 – LIQUIDITY:  Emergencies happen all the time.  Plan for them.  It is important to have extra money when surprises happen and this money needs to NOT be tied up in accounts that you can’t get at. It must be liquid funds. As important as liquid cash is in an emergency, remember you must first create Bucket 1.

Bucket 4 – LONG-TERM CARE:  If you have enough guaranteed income (Bucket 1), which is inflation-proof (Bucket 2), and adequate liquidity (Bucket 3), then you may not need to purchase a long-term care insurance policy. As you can see, the order by which you deal with each bucket is most important.  Many people have enough income, so they don’t need to worry about long-term care.  However, let us assume you don’t have enough guaranteed income to pay for care in your old age. Now what?  I am sure you understand that a prolonged visit at a nursing home or assisted living center or hiring home health care can quickly wipe out all your retirement savings.  After a prolonged illness, surviving spouses can be left penniless.  We love our spouses and will do most anything to assist them.  But what if you are the one to go to a care center?  What if you were the one who drained the retirement money, how would you feel?  To solve this, you will need to purchase a long-term care insurance policy.

Bucket 5 – LEGACY:  If you have prepared the other four buckets appropriately, you will create a beautiful legacy for your loved ones. The fifth bucket can only be filled once you have the other four in place. Once you do, then you are ready to do final preparations where you get organized, create a living trust with a will, and a medical directive with a power of attorney.  Keep this updated with family changes. When you die, you will make your family very happy if you have done all this organization in advance. You will be remembered as someone who truly loved his/her family, even from the grave, because you thought enough about those you love to plan ahead.   Contrast this with six out of seven people who die with no will/trust, no records, no list of assets and no written plan… essentially, no legacy. How do you think this disorganized person will be remembered?

Your life can be financially rewarding if you have planned well, lived well and died well.  Money is not the most important thing in life, but it has the largest impact on relationships and memories.  For you to achieve financial peace of mind in this life, I suggest you prepare these 5 buckets in exactly the order I have prescribed. If you do, you will be ready to retire, and ready to go when the time comes having prepared properly.