So this is a story about a guy named Brian C. Williams who recently wrote an article for Yahoo Finance where he explains how he can live a six-figure lifestyle on a $30,000 salary. Mr. Williams discusses how he was able, with a little work, to find great deals on luxury homes, fancy cars and high-dollar watches. If he can do it then so can you.
This article is interesting for retirees for two reasons. First, is shows that you can live well on relatively little money. The second reason why this article should be on interest to retirees, and those planning to retire, is more of a question. That question is: why does Mr. Williams feel he needs those luxury homes, fancy cars and high-dollar watches?
Who is he trying to impress? And as a retiree, or someone planning to retire, you should ask yourself the same question. Who are you trying to impress? Do you really need a mansion, a luxury car and a $800 dollar watch to be happy?
How much faster would Mr. Williams be able to become financially independent if he had used his considerable bargain hunting skills to find a modest home, a fuel efficient small car and a Timex? If Mr. Williams can live a luxury lifestyle on $30,000, how much less would he need to live a more modest lifestyle. Food for thought.
Wednesday, May 11, 2011
Friday, December 4, 2009
Life Span: Retirement Planning's Missing Link
Retirement planning would be easy if you knew exactly how long you were going to live. While this variable in your retirement calculator is unknown, it is not unpredictable. The question is whether these predictions are worth anything.
There are several methods by which you could make an educated guess as to your lifespan.. First there are simple actuarial tables. These are the tables used by life insurance companies and while they are fairly accurate for groups of people, they are probably not as accurate for individuals. Then there are more detailed calculators like the Northwest Mutual Life Insurance Company's Lifespan Calculator and MSN's Life Expectancy Calculator.
The results vary widely. The actuarial tables suggest I'll live 26.83 more years or until almost 80 years of age, while Northwest Mutual's calculator has me living until age 90. Best of all, according to MSNs calculator, I'll live to age 93. While I don't care much for MSN's products, I really like their calculator!
So how should you plan your retirement? As you can see these lifespan estimates aren't very helpful. If you had my numbers would you need your retirement money to last only until age 80 or all the way to age 93? My suggestion is to use a wide variety of calculators and then shoot for lifespan somewhere in the middle of the estimates.
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In addition, it helps to live in your retirement as frugally as possible and to leave a little cushion in your retirement calculations such as excluding some (or perhaps all) of the equity value of your home in your net worth. That way if you live to the ripe old age of 100 or more, you can take out a reverse mortgage to fund your gravy years.
There are several methods by which you could make an educated guess as to your lifespan.. First there are simple actuarial tables. These are the tables used by life insurance companies and while they are fairly accurate for groups of people, they are probably not as accurate for individuals. Then there are more detailed calculators like the Northwest Mutual Life Insurance Company's Lifespan Calculator and MSN's Life Expectancy Calculator.
The results vary widely. The actuarial tables suggest I'll live 26.83 more years or until almost 80 years of age, while Northwest Mutual's calculator has me living until age 90. Best of all, according to MSNs calculator, I'll live to age 93. While I don't care much for MSN's products, I really like their calculator!
So how should you plan your retirement? As you can see these lifespan estimates aren't very helpful. If you had my numbers would you need your retirement money to last only until age 80 or all the way to age 93? My suggestion is to use a wide variety of calculators and then shoot for lifespan somewhere in the middle of the estimates.
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In addition, it helps to live in your retirement as frugally as possible and to leave a little cushion in your retirement calculations such as excluding some (or perhaps all) of the equity value of your home in your net worth. That way if you live to the ripe old age of 100 or more, you can take out a reverse mortgage to fund your gravy years.
Thursday, November 12, 2009
Should You Be Worried About Low CD Rates?
A recent trip to my credit union to purchase a CD was a surprise. A 3-month CD yielded a measly 1.32 percent. A 5 -year CD wasn't much better at 3.43 percent. But these low rates got me thinking about another rate and that's the inflation rate. (See: http://www.inflationdata.com/inflation/Inflation_Rate/CurrentInflation.asp for the raw inflation data.). The annualized inflation rate for the month of September 2009 was -1.3 percent. That "minus" means that goods and services cost an annualized 1.3 percent less in September 2009 than they did the year before. So if I had a 3-month CD which paid me an annualized rate of 1.32 percent in this inflation environment, my "real" annualized yield for the month of September 2009 would be 2.62 percent (i.e., 1.32-(-1.3)= 2.62). If I had a 5-year CD my "real" annualized yield for the month of September 2009 would be 4.73 percent. Not bad!
Consider the same CD in January 2006. According to government statistics (the Federal Reserve's H.15 publication), in January 2006 a 3-month CD yielded 4.56 percent. That month the inflation rate was 4 percent, meaning that the saver's "real" annualized yield for that month was only .56 percent.
So, while today's CD rates seem low, the "real" return to the saver is much more than they were in 2006 (after taking the inflation rate into account). In fact, a few quick calculations shows that 2009 is turning out to be a much better year for CD investors, if you consider the CD return over inflation, than the 3 previous years.
I compared the 3-month Certificate of Deposit Index (CODI) (calculated by averaging the previous 12 rates of the 3 month CD rate. which is less volatile than straight CD rates) for each of 2006 through 2009 and compared it to the inflation rate for the same periods, I found the annualized returns over the inflation rate for 2006, 2007, 2008 and 2009 were 1.267, 2.432, 0.156 and 3.116 percent, respectively.
So the low CD rates offered by banks and credit unions aren't as bad as the seem at first blush. In addition, when you consider the taxes you pay on your returns, today's inflation (or rather, deflation) environment is even better.
Lets say for simplicity that the 3-month CD rates held steady at 4.56% and 1.32% for the whole year in 2006 and 2009, respectively, and similarly the inflation rates for those years held steady at 4% and -1.3, respectively.
Back in 2006 let's assume you put $100 in a one year CD which paid 4.56% interest. So you "earned" $4.56 on your CD for that year and paid taxes on that amount. Let's say you were in the 30% tax bracket and paid 30% of that $4.56 (or $1.39) to the government in taxes. But remember that in 2006 the inflation rate was 4% and therefore your "real" return after inflation on your $100 CD was only $0.56. Yet you paid $1.39 in taxes! So for 2006 you lost $.81.
Let's go forward to 2009 when you will "earn" only $1.32 on your $100 CD, pay your 30% taxes of $.40 for a net of $.92. But, after considering that inflation is only -1.3 in 2009 your "real" return after inflation in 2009 will be $2.22!
Do I have this math all wrong? It seems to me that 2009 will turn out to be a good year for CD investors (assuming, of course, that the inflation rate (or, rather, the deflation rate) doesn't change.
Consider the same CD in January 2006. According to government statistics (the Federal Reserve's H.15 publication), in January 2006 a 3-month CD yielded 4.56 percent. That month the inflation rate was 4 percent, meaning that the saver's "real" annualized yield for that month was only .56 percent.
So, while today's CD rates seem low, the "real" return to the saver is much more than they were in 2006 (after taking the inflation rate into account). In fact, a few quick calculations shows that 2009 is turning out to be a much better year for CD investors, if you consider the CD return over inflation, than the 3 previous years.
I compared the 3-month Certificate of Deposit Index (CODI) (calculated by averaging the previous 12 rates of the 3 month CD rate. which is less volatile than straight CD rates) for each of 2006 through 2009 and compared it to the inflation rate for the same periods, I found the annualized returns over the inflation rate for 2006, 2007, 2008 and 2009 were 1.267, 2.432, 0.156 and 3.116 percent, respectively.
So the low CD rates offered by banks and credit unions aren't as bad as the seem at first blush. In addition, when you consider the taxes you pay on your returns, today's inflation (or rather, deflation) environment is even better.
Lets say for simplicity that the 3-month CD rates held steady at 4.56% and 1.32% for the whole year in 2006 and 2009, respectively, and similarly the inflation rates for those years held steady at 4% and -1.3, respectively.
Back in 2006 let's assume you put $100 in a one year CD which paid 4.56% interest. So you "earned" $4.56 on your CD for that year and paid taxes on that amount. Let's say you were in the 30% tax bracket and paid 30% of that $4.56 (or $1.39) to the government in taxes. But remember that in 2006 the inflation rate was 4% and therefore your "real" return after inflation on your $100 CD was only $0.56. Yet you paid $1.39 in taxes! So for 2006 you lost $.81.
Let's go forward to 2009 when you will "earn" only $1.32 on your $100 CD, pay your 30% taxes of $.40 for a net of $.92. But, after considering that inflation is only -1.3 in 2009 your "real" return after inflation in 2009 will be $2.22!
Do I have this math all wrong? It seems to me that 2009 will turn out to be a good year for CD investors (assuming, of course, that the inflation rate (or, rather, the deflation rate) doesn't change.
Wednesday, November 4, 2009
Retirees Sleep Better! (Who Knew?)
It's official. Retirees sleep better that working folks. Gosh! What a surprise.
A recent Finnish study entitled "Effect of Retirement on Sleep Disturbances: the GAZEL Prospective Cohort Study" concluded that retirees sleep a lot better than people who work. You probably suspected that this might the case.
Surely you can imagine the soporific effect of spending the day reading a good book in a hammock as opposed to working like a dog and being chewed out by your boss. But now it's no longer conjecture. The study reported "repeated measurements [that] provide strong evidence for a substantial and sustained decrease in sleep disturbances following retirement." So now it has been proven: retirement equals better sleep. The improvement in sleep was more pronounced in men than in women, but both groups registered significant improvement in sleep.
Need a good night's sleep? Perhaps retirement is for you. Sweet dreams!
Sunday, October 25, 2009
Need Help Saving Money? Frugal living can help.
When planning for retirement, or living in retirement, many people need help saving money. Being frugal can help. There's a difference between a someone who is frugal and someone who is a cheapskate or a skinflint. Cheapskates and skinflints tend toward the miserly side of the spectrum. Someone who is frugal, on the other hand, is wise with his or her money. Frugal people enjoy life to the fullest, but they don't pay full price. To get you started on your frugal life, I found this nifty website with 50 tips on frugal living which may be of help to you. I'm doing most of them already (although, I'll admit, I still have a cell phone). See how many of the 50 you can incorporate into your life.
If you need help with retirement planning, including some of my frugal living tips, check out my book, Who Said You Need Millions? Retirement Strategies for the Rest of Us, available at online bookstores.
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