» Funding Retirement

The Impact of Inflation

admin — Thu, 09 Jul 2009 15:05:54 +0000

People now need to adjust their estimated post-retirement needs for inflation. Although people can’t know what future inflation will be, they can look at what it has been in the past and use their judgment to pick a rate for planning purposes.

The amount of personal savings they will need to fund their retirement depends on several variables including inflation, return on investments, and how long people will live. People already have an assumption about inflation. People can now summarize the savings required to fund their retirement income needs.

As a result of these calculations, people should have a good idea of their prospects for a financially secure retirement. However, if the amount required to fund their retirement income needs seems out of reach, here are some alternatives:

 Delay retirement a few years to allow more time to add to their savings and reduce the number of years for which People need to provide.

 Review their post-retirement budget for expenses that can be reduced.

 Review their assumptions about rates of return on their savings. Perhaps a bit more risk is required.

 Consider working part-time to supplement their income.

Estimating the Needs

admin — Thu, 09 Jul 2009 15:02:10 +0000

The starting point is to estimate the income level people will need in retirement to live the lifestyle people have become accustomed to, taking into account changes retirement will bring. Start by working up a detailed budget for their current living expenses, then adjust each item based on how People think their retirement lifestyle will affect it—will it go up, remain the same, or go down?

Debt Reduction

admin — Thu, 09 Jul 2009 14:56:55 +0000

Consumer debt (for example, credit card, credit union, and in-house financing) is a very expensive way to spend their money. Interest is no longer deductible on their income tax and the interest rate is substantial. If People want to make 15 percent to 20 percent on their money, simply pay off consumer debt. And, clear all credit card balances at the end of each billing cycle. If not paid on time, people can become bankrupt too. As a rule of thumb, don’t buy anything on credit that will not last at least as long as the payments required to pay for it. Reducing debt increases net worth. But where do People start? Logically, the debt bearing the highest interest should be paid off first. This includes all of the credit card balances they have been carrying. Another way to solve the problem brings greater psychological rewards: pay off the smallest balances first. Otherwise, people may become too discouraged over the seeming lack of progress. If their consumer debt is substantial, people may need to consider paying off high interest debt
with less expensive money. Here are some potential sources of lower interest loans.
 Borrow against securities in their brokerage account. People can deduct the interest as long as it doesn’t exceed net investment income.

 Borrow against the cash value of their life insurance.

 Refinance their home mortgage or add a home equity loan to turn nondeductible debt into deductible debt.

 Borrow against their bank fixed deposits.

 Borrow against their retirement account.

Summarize the spending

admin — Thu, 09 Jul 2009 14:53:23 +0000

If we look over the cash flow analysis and summarize the spending in three categories, first, calculate the amount of their monthly fixed expenses. This includes rent or
mortgage payments, utilities, car payments, gas and oil, and operating expenses. Second, calculate their necessary variable expenses. This includes taxes, insurance, car and home repairs, and doctor and dentist bills. Third, calculate their discretionary expenses. This includes gifts, contributions, and entertainment.

Analyze the Cash Flow

admin — Thu, 09 Jul 2009 14:49:56 +0000

If a review of the net worth suggests something needs to be done to improve the financial situation, the best way to understand the problem is to compare what people earn to what people spend. This is called a cash flow analysis. It gets to the basic question of how much of their income is spent on debt service, consumption, and savings. It also answers the question of how much more people are spending than people have coming in or vice versa.

It is not easy to get the necessary information to do a good cash flow analysis. One can start with their checkbook, credit card statements, and tax records. The most difficult information to get will be what people spend on cash purchases. The best approach is to keep a journal for a couple of weeks to get a pattern and then estimate the amounts factoring in their personal experience. Income information should be available from their tax records.

From an analysis of their cash flow statement, people will know where their money goes and whether their outgo exceeds their income. Also, people can set goals and plan to overcome problems in their personal finances. These goals and plans become a budget, or working guideline, for the coming year.

It has been observed that many households live paycheck to paycheck worldwide. This creates a problem. They are never able to save anything to meet future financial needs. As a result, they may never be able to retire or, if they do, they will be faced with a meager existence. By getting their income and outgo in balance, People can have a brighter financial future. If they having trouble putting enough aside to fund their retirement, here are some ideas that will help.

Personal Use Assets

admin — Thu, 09 Jul 2009 14:46:37 +0000

This includes their home, furnishings, automobiles, recreational vehicles, furs, jewelry, collections, tools, and equipment.

To compute their net worth, gather all their financial records such as checkbooks, statements from banks, mutual funds, credit unions, and brokerage houses, and their loan balances. Check the value of their residence, automobiles, tools, and equipment by reading the classified section of their daily newspaper.

Invested Assets

admin — Thu, 09 Jul 2009 14:41:12 +0000

These are fixed deposit, stocks, bonds, mutual funds, partnership, mortgages, real estate, annuities, and retirement plans.

Cash Reserves

admin — Thu, 09 Jul 2009 14:38:59 +0000

This includes funds that are readily available in their banking accounts.

Net Worth Analysis

admin — Thu, 09 Jul 2009 14:36:51 +0000

The first step in the analysis is to determine the net worth. This is a summary of their spending and saving habits. It shows the cumulative effect of their financial decisions. It not only shows how they are doing, but also gives clues to potential changes to improve their financial future.

In simple terms, their net worth is the difference between what people owe and what people own. If people come out owning more than people owe, people have a positive net worth. If the opposite is true, people have a negative net worth. Net worth statements have common categories of assets and debts. Debts are generally divided into two categories: secured and unsecured. Assets are generally divided into the following categories:

Current Financial Status

admin — Thu, 09 Jul 2009 14:34:36 +0000

The place to begin an analysis of what people need to do for a financially secure
retirement is to look at their finances today. This will give them insight into how they are spending their money, whether they are getting ahead, and how much they have been able to save.