Retirement Planning: Inflation and the Jetson’s car

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When I teach retirement income planning classes I love to ask attendees to jot down how much they paid for their first house, then I ask them to write down how much they paid for their last car. While I don’t ask them to share these numbers with the class, it does start a lot of discussion. And laughter. What usually comes out of this exercise is the fact that most of the retired folks in the room paid more for their last car than they did for their first home!

Inflation takes quite a toll on the wallet. We notice this happening as the price of items rise and rise over the years; milk, gas, property taxes and, as in the example above, cars.

If you set up house at the age of 22 and retire at the age of 65 that is a span of 43 years. That gives you 43 years to earn income and invest for the future.

If you retire at the age of 65 how long do you want to plan for in retirement? Do you plan for 90 years old? 95? 100? Depending on your age, gender, health, and longevity in your family, retirement can last 25, 30, 35 or more years!

And if you plan on retiring early, you might be retired for as many years as you worked!

Let’s say you finish college at 22 and work until you are 62; you worked 40 years. If you live to 102, you would be retired for 40 years.

If you think inflation is a challenge while you are in your earning years, imagine what it is like during retirement when you are tapping into the portfolio that you created for retirement.

Here is some food for thought. Let’s take the car example from above and see what type of impact inflation has on car prices during your retirement years.

Last year and the first two months of this year, the Toyota Camry was the best-selling car in America. The 2012 Toyota Camry LE model has a base MSRP of $22,500 in today’s dollars. Not the least expensive model, the L, but not the more expensive models, SE or XLE, either.

Let’s use an example of a 55 year old who is thinking of replacing their car every seven years in retirement. If the car sells for $22,500 now and inflates at 3% a year, they want to know what a Toyota Camry LE would cost at the following ages:

At 65 years old a 2022 Toyota Camry LE is estimated to be $30,238
At 72 years old a 2029 Toyota Camry LE is estimated to be $37,189
At 79 years old a 2035 Toyota Camry LE is estimated to be $45,738
At 86 years old let’s assume they are still driving, not as much as they used to, and mostly during the day, but their family insists that they have a reliable car, so they relent and end up spending $ 56,252 on the 2043 Toyota Camry LE.

If they maintain the car well and don’t put a lot of miles on it, they could look to knock off a quarter to a third of the price with a trade in if they are trading in every seven years.

What if your tastes run more toward Lexus than Camry? Let’s look at this example with the 2012 Lexus GS (again not the most expensive model, nor the least expensive) with a base MSRP of $46,900 in today’s dollars.

Let’s use the same example of a 55 year old who is thinking of replacing their car every seven years in retirement. If the car sells for $46,900 now and inflates at 3% a year, they want to know what a Lexus GS would cost at the following ages:

At 65 years old a 2022 Lexus GS is estimated to be $63,030
At 72 years old a 2029 Lexus GS is estimated to be$77,519
At 79 years old a 2035 Lexus GS is estimated to be $95,338
And at 86, in this example as well, they listen to their family and buy a new car so they have a reliable car, making the family feel better. They end up spending $ 117,254 on the 2043 Lexus GS . The good news is, the year is 2043, so it is the Jetson’s edition so it can fly.

In discussing future plans with families, I find that car replacement during retirement years is the most frequently forgotten item when individuals plan on their own. But having read this, you know to factor it in. Many people make the mistake when planning of assuming that they can keep the same car throughout retirement. Keep in mind that you may be retired for almost as many years as you were working. Think about how many cars you owned while working and consider if it would be realistic to have one car for a period approximately as long as that. You will possibly be driving more in the early years of retirement, because retired people are the busiest people I know. They have been putting off all the things they wanted to do; now they get to do them! But the amount of driving does slow down significantly in the later years for most, but not for everyone. Also, consider if you have more than one driver, you may be replacing more than one car in retirement. Forewarned is forearmed! If you haven’t already, be sure to account for car replacement and the inflation of the car prices in your retirement projections.

What are stocks and why should you invest in them?

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What is a stock?
The ownership of a publicly traded corporation is separated into shares of common stock, which is a type of investment. When you invest in common stock (buy shares) you become a partial owner (shareholder) of a corporation and you take on some of the risks and rewards of being an owner of a company. Equity is another word for stock.

Why buy stock?
To make money.  Although, you can lose the money you invest, that is the potential reward vs. risk of stock investing. There are two opportunities to make money on stocks 1) capital gains and 2) dividends.

Capital Gains and Capital Losses
The dollar value per share of stock will fluctuate up and down depending on the perceived value of the share of stock. Stock is sold in an environment where there are buyers and sellers and it is their perception of the value of the stock that drives the price up and down. The buyers and sellers are observing many variables, some of which are directly tied to the stock itself, some of which are related to the stock’s competitors, some variables pertain to the U.S. economy as a whole, and some variables pertain to markets overseas. There are so many factors that go into the daily fluctuation of the price of the stock; it isn’t just the underlying value of the corporation itself that determines the share price of a stock.

If you buy a stock for $10 per share and sell it for $15 per share you have a capital gain of $5 per share.  Congratulations, you have made money on your investment! Don’t get too excited though, Uncle Sam wants his cut.  You will have to claim the income on your tax return. If you have held the investment for less than a year (short term capital gains); it will be taxed at your income tax rate. But it isn’t all bad news; for investments that were held longer than a year (long term capital gains); the 2012 capital gains tax rates are lower than income tax rates; 15% for those in the 25% income tax bracket or higher and 0% for those in the 15% income tax bracket or lower.

If however, you buy a stock for $10 and you sell it for $8, then you have a capital loss of $2, you have lost money on your investment. Uncle Sam lets you write losses against gains, and then write off $3,000 of capital losses against income as a capital loss deduction and then carryover any remaining loss to be used in future years.

See the www.irs.gov website for details.

Dividends
One of the rewards of being a shareholder includes participating in the earnings of the company, if they are paid out, in the form of dividends. Keep in mind that sometimes companies keep their earnings to invest back into the company with the goal of improving the company.

Shareholders also have the opportunity to vote on the election of board of director members and mergers and acquisitions.

FAFSA: Missouri deadline approaching

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What is the FAFSA?
FAFSA is the abbreviation for Free Application for Federal Student Aid. It is the form that you complete when applying for financial aid.  Financial aid is awarded as grants (you do not pay it back) and/or student and parent loans (you do pay it back, with the exception of loan forgiveness programs.)

Should you fill out the FAFSA?
Yes. When working with higher income households, people often indicate that they do not intend to complete the FAFSA. I encourage them to fill out the form, so that they may keep their options open. If their student applies to a private school, they may qualify for aid directly from the school. Private schools often have their own pool of funds to draw from when awarding aid to students, and create their own processes for awarding aid. However, completing the FAFSA is usually part of the process as well as the school’s own financial aid form. Public schools sometimes have awards to give as well, and part of the procedure at some of these schools is having a completed FAFSA form, so keep yourself in the game and fill out the form by the deadline in order to keep your options open.

What is the Missouri FAFSA deadline?
The FAFSA deadline for the 2012-2013 school year for Missouri is April 2, 2012. However, each school can have their own deadlines for priority award consideration. As an example, Mizzou’s FAFSA priority deadline was March 1, 2012 in order to apply for money that the University of Missouri had to give. If you missed that deadline you still have time (until April 2, 2012) to apply for money from state and federal programs. Being aware of each school’s individual FAFSA deadlines is a good opportunity for your student to practice their research and organizational skills. The best strategy is to complete the FAFSA as soon as possible after the first of the year. Watch the mail for W-2s and other tax forms that you will need.

Where can you go to get FAFSA questions answered?
The US Department of Education’s website www.fafsa.ed.gov is a great place to go to find out deadline information and get questions answered about the FAFSA form.

Garrett Planning Network: The best of both worlds

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Garrett Planning Network is an international group of independent fee-only financial planners and advisors.  To be a member you must be a fee-only advisor, meaning your compensation can only come from the client not from commissions, referral fees, or sales incentives.  That independence ensures no outside influences affect the recommendations.  Another important distinction of the Garrett Planning Network is that the members primarily deliver advice on an hourly as-needed basis.

The Garrett Planning Network is a professional organization, like the National Association of Personal Financial Advisors (NAPFA) or the Financial Planning Association (FPA).  However, it is so much more; it is a way to jumpstart your practice and better serve your clients.

Jumpstart

When I started Clark Hourly Financial Planning, I had definite ideas about the types of services I wanted to provide clients and the kinds of relationships I wanted to build.  But I didn’t want to spend a lot of time or thought process on what the forms should look like and other the minutiae of setting up a new business from scratch.  Therefore I purchased the forms, manuals, and suggestions for processes from Garrett Planning Network, so that I could tweak them to make them my own and get started sooner on my favorite part of the business, working with clients.

Better serve

The reason I stay a member is the ongoing support that I get from the community of more than 300 independent financial planners.  We are all connected through an intranet Knowledge Bank, which we can post to whenever we want to get a second opinion on a case we are working on or to share ideas.  I can tap into this group of financial planners, some of whom have been planners for their whole careers, while others have a background as CPAs, or attorneys, have been in human resources, insurance, or mortgage lending.  This is an invaluable resource which benefits my clients and me.

I have the benefit of being an independent financial planning business owner and the advantage of having colleagues to bounce my ideas off of – the best of both worlds!

Financial Planning Association: An Educational Benefit

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What is the Financial Planning Association (FPA)
The Financial Planning Association is the largest membership organization dedicated to supporting personal financial planning experts in the nation. While it is generally thought of as the group for CFP® practitioners, you do not have to be a CERTIFIED FINANCIAL PLANNER™ to belong. People who support the financial planning process are able to join as well. There are about 95 chapters nationwide and tens of thousands of members. There are about 15,000 members who are a CFP® practitioner. Other types of professionals that are members are attorneys, CPAs, insurance agents, investment company representatives, and others.

Stay up to date on financial planning topics

The St. Louis, MO chapter has a monthly meeting. Each month there is a different guest speaker, usually someone local, sometimes someone from out of town. This is a good way to stay up to date on various subjects. Past topics have included; a tax update with a focus on estate planning, a health insurance reform update, economic update, and Medicare information. Future topics this year include; the banking crisis, alternative investment strategies, long-term care protection planning, tax traps in annuity planning, and Modern Portfolio Theory 2.0. I earn continuing education credit hours for attending these educational meetings, which is fortunate because I need many hours as a requirement for my designations and memberships in some organizations.

Financial education resources

This is an industry that is full of constant change so reading is a must. As a member I receive a subscription to the Journal of Financial Planning, access to research and whitepapers, and a daily retirement planning newsletter e-mail. I also receive subscriptions to Kiplinger’s, Bloomberg Businessweek, Money, and Smart Money, so that I can stay on top of what my clients are reading.

There are different reasons that I am a member of each of the professional organization to which I belong; the National Association of Personal Financial Advisors (NAPFA), the Garrett Planning Network, and the Financial Planning Association (FPA). The primary reason I belong to the Financial Planning Association is for the educational benefit to me which of course benefits my clients in the long run.