Your Key To A Successful Retirement - Part 1 of 2
I was prompted to write on this subject because of something contained in the current (February 28, 2005) issue of Business Week. They posed this question to a group of millionaires: "How much (money) guarantees a worry-free future?" Here's what wealthy individuals said they would need:
Those with $1 Million+ could live comfortably on a $2.4 Million nest egg.
Those with $5 Million+ could live comfortably on a $10.4 Million nest egg.
Those with $10 Million+ could live comfortably on an $18.1 Million nest egg.
Now the question is this... How about you?... Do you want to have a comfortable, even luxurious, retirement?... And if so, do you know the steps necessary to bring you to that point?... We'll talk about this today as well as in our next message but first of all let me show you an example of just how quickly you can lose a million dollars if you allow the twin ravages of taxes and inflation to run unchecked.
We have been very fortunate in recent years to experience a rather benign core rate of inflation which has ranged between 1% to 4%. And in fact, the rate of inflation for the first four months of the current fiscal year has increased by only 0.2% per month - giving us a projected annual rate of inflation of 2.4% for 2005... But let's take a look at just how inflation might affect a hypothetical millionaire whom we'll refer to as "Mr. M" for this discussion. This "Mr. M" has a comfortable million dollars in cash assets, this is over and above the value of his home which is mortgage-free. And let's assume that our "Mr. M" will earn 10% this year on his $1 million cash.
Mr. M is likely going to be faced with paying both State and Federal taxes on his $100,000 gross income from that $1 million in cash. So let's say that he will have $70,000 left after taxes (also known as passive income) which you might say is not too shabby an amount for a retirement income... The guy is all set you may be thinking... but is he really? What about the inflation that I mentioned previously?
One very important fact that many people forget about is the idea that you must not spend your way into a retirement poorhouse. And how do you avoid doing that? You avoid that by setting aside enough capital so as to maintain your purchasing power. Thus if the core rate of inflation is 4%, our "Mr. M" would need to add 4%, or $40,000, to his $1 million capital pool in order to maintain his purchasing power. However, in doing so, "Mr. M" would then have reduced his spendable income to only $30,000 ($70,000 minus $40,000) which suddenly makes his after-tax spendable income look not so good!... But if you think that's bad with an inflation rate of 4%, then try running the figures using 10% in the above example.
If our "Mr. M" decided to ignore inflation by spending his entire 10% each year and not putting enough back in order to replace what is lost to inflation, he would lose slightly more than half his purchasing power over 15 years time, and his annual income at 10% would be reduced to just under $30,000 before taxes. And his savings would be reduced as well because he was forced to dip into those savings in order to maintain his level of purchasing power!
In case you didn't get it up to this point, the message here is very clear: Preserve Your Principal! And one way to do this is by increasing your portfolio income. In the case of our "Mr. M" - if he were to increase his portfolio income by just 1%, he would then have $110,000 in gross portfolio income. Taking away the same $40,000 in order to maintain his purchasing power, and paying the same rate of taxes, this would give "Mr. M" $40,000 in spendable income (up from $30,000) which would be an increase by one-third, and this all resulted by simply increasing his portfolio income by an annual one-percentage point!
Next time, we'll talk about some ideas that you can use to set up a worry-free retirement program that will help you to stay ahead of both inflation and taxes!
* * * * *
Those with $1 Million+ could live comfortably on a $2.4 Million nest egg.
Those with $5 Million+ could live comfortably on a $10.4 Million nest egg.
Those with $10 Million+ could live comfortably on an $18.1 Million nest egg.
Now the question is this... How about you?... Do you want to have a comfortable, even luxurious, retirement?... And if so, do you know the steps necessary to bring you to that point?... We'll talk about this today as well as in our next message but first of all let me show you an example of just how quickly you can lose a million dollars if you allow the twin ravages of taxes and inflation to run unchecked.
We have been very fortunate in recent years to experience a rather benign core rate of inflation which has ranged between 1% to 4%. And in fact, the rate of inflation for the first four months of the current fiscal year has increased by only 0.2% per month - giving us a projected annual rate of inflation of 2.4% for 2005... But let's take a look at just how inflation might affect a hypothetical millionaire whom we'll refer to as "Mr. M" for this discussion. This "Mr. M" has a comfortable million dollars in cash assets, this is over and above the value of his home which is mortgage-free. And let's assume that our "Mr. M" will earn 10% this year on his $1 million cash.
Mr. M is likely going to be faced with paying both State and Federal taxes on his $100,000 gross income from that $1 million in cash. So let's say that he will have $70,000 left after taxes (also known as passive income) which you might say is not too shabby an amount for a retirement income... The guy is all set you may be thinking... but is he really? What about the inflation that I mentioned previously?
One very important fact that many people forget about is the idea that you must not spend your way into a retirement poorhouse. And how do you avoid doing that? You avoid that by setting aside enough capital so as to maintain your purchasing power. Thus if the core rate of inflation is 4%, our "Mr. M" would need to add 4%, or $40,000, to his $1 million capital pool in order to maintain his purchasing power. However, in doing so, "Mr. M" would then have reduced his spendable income to only $30,000 ($70,000 minus $40,000) which suddenly makes his after-tax spendable income look not so good!... But if you think that's bad with an inflation rate of 4%, then try running the figures using 10% in the above example.
If our "Mr. M" decided to ignore inflation by spending his entire 10% each year and not putting enough back in order to replace what is lost to inflation, he would lose slightly more than half his purchasing power over 15 years time, and his annual income at 10% would be reduced to just under $30,000 before taxes. And his savings would be reduced as well because he was forced to dip into those savings in order to maintain his level of purchasing power!
In case you didn't get it up to this point, the message here is very clear: Preserve Your Principal! And one way to do this is by increasing your portfolio income. In the case of our "Mr. M" - if he were to increase his portfolio income by just 1%, he would then have $110,000 in gross portfolio income. Taking away the same $40,000 in order to maintain his purchasing power, and paying the same rate of taxes, this would give "Mr. M" $40,000 in spendable income (up from $30,000) which would be an increase by one-third, and this all resulted by simply increasing his portfolio income by an annual one-percentage point!
Next time, we'll talk about some ideas that you can use to set up a worry-free retirement program that will help you to stay ahead of both inflation and taxes!
* * * * *
posted by Bob Moser at
3:44 PM
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