As 2013 ends, it's traditional for Americans to have New Year's Resolutions for the coming year. The most common are “Quit Smoking” and “Lose Weight”, and most will not do what's required to achieve their goals. Let's list some financial and tax resolutions that, hopefully, are easier to implement.
Calculate Your Retirement Goals in Dollars: This involves determining how much annual spendable income you need in your retirement years. I advise people to ignore the conventional financial suggestion that you can live on 70 percent of your working income. Why would you plan on spending less? Do you want to cut back on eating out and entertainment by 25-50 percent? Do you want to take no vacations instead of the normal 2-3 weeks you get while working? When you retire, you now have unlimited time to pursue your dreams.
Understanding the Effects of Inflation: If you think you need $ 50,000 of after-tax income for your first year of retirement, look at the effect of various levels of inflation. The US government says that over the last 50 years, average inflation has been around 3 percent. I believe that's a conscious understatement. In the 1970s, the US government developed the Core Consumer Price Index, which excluded goods with high price volatility, such as food and energy. According to Wikipedia, “on January 25, 2012, the Fed announced they would stop using the core CPI and rather instead on the Personal Consumption Expenditures Price Index (PCE).” If one looks back to 1992, this PCE index raises one-third percent lower than the CPI index.
Dr. Wong comment: I'd like to see anyone in Congress live one month without any food, gas, or utilities. If you use a future 5 percent inflation projection, which may be very realistic for seniors as their medical bills increase, spending $ 50,000 today would require $ 81,444 in 10 years; $ 103,946 in 15 years: $ 132,665 in 20 years; and $ 216,097 in 30 years. Many Baby Boomers want to retire by 65 or younger. Actuarial studies show that there's a 50 percent chance that at least one of a 65-year-old couple will live till 93. Your money may have to last for 20 to 30 years in retirement.
Understand Risk vs. Return: Let's suppose that your life savings is $ 800,000 of liquid funds, if it is composed of money in the bank; brokerage accounts; mutual funds; individual stocks and bonds; or cash value of annuities and permanent life insurance. If you risk your funds with Wall Street, and your funds increase 50 percent to $ 1,200,000, you are excited. Ask yourself whether this will significantly increase your happiness in retirement. On the other hand, if you lose 50 percent on Wall Street, you now have $ 400,000. Will this now significantly decrease your ability to pursue your dreams, such as: overseas travel; helping grandkids pay for college; Egypt pursuing expensive hobbies? Everyone wants to dream about profits, but few understand how losses will affect their retirement lifestyle. Remember, Warren Buffett's Number 1 Rule is: “Do not Lose Money!” His Rule Number 2 is: “Do not Forget Rule Number 1!”
Save Taxes: Most people think of January through April 15 as tax preparation time. Instead, this should be when you implement tax planning strategies so that by December 31, you have reduced your taxable income and there before your income taxes due when you file your tax return by next April 15. If you have a profitable business, pay your kids for work and deduct travel, entertainment, and car expenses. Start a family 401 (k) and / or a defined benefit pension plan. If you do not have a business, start a side business in addition to your job.
Conclusion: Use the Holidays to write down a concrete financial and tax plan for 2014. Your retirement future depends on this.