Two More Money Tips

By Gary Silverman, CFP®

I wanted to thank those of you who were able to follow the previous few months of my marathon/personal finance saga. Of course, not every financial lesson dovetails into a story about running. Plus, there’s only so much room in the column. So, I’m now going to fill in a few thoughts that came to me but didn’t make it into the series.

• It’s what you get to spend that matters.

Person walks into my office saying that they have $1 million in a 401(k) plan. They have used one of my thumb rules that states a 4% annual withdrawal (so $40,000 a year) can be taken from it. Let’s assume that the 40K works fine for their specific circumstances. All good then, right?

Not exactly.

You see, there is a system in this country known as taxation. You may have heard of it. It seems really popular in April. The point is that the $40,000 withdrawal will incur the taxing wrath of Uncle Sam. Are they in the 12% marginal tax bracket? Then their $40,000 withdrawal nets them $35,200. A 22% bracket only nets them $31,200.

When planning for your future investment returns, don’t forget about taxes. You only get to spend what you get to keep.

• Things get more expensive (usually).

I’ll admit that my current phone has about as big a screen and well over 1000x more power than my first computer. Yet it costs less than a quarter what that original computer did. Computers have gotten a lot cheaper over the last few decades.

Most everything else has not.

A person coming into my office might want a nice steady income, with no downside risk, and not have to worry about living longer than their money. They tell me they want an annuity. Now, there is nothing wrong with having an annuity. Annuities are great (well, some are). Annuities are the answer for many needs a person might have.

But most annuities have a little problem. They keep paying you no matter what.

Wait, that doesn’t sound like a problem. True, it’s not. The problem is when the person thinks that the annuity will allow them to keep buying the same stuff in 10 years that they can buy with the money today. You see, most annuities do not have an inflation adjustment. So, if it starts paying $1000/month in 2019, it will still be paying $1000/month in 2049.

And my guess, other than perhaps my computer, everything will cost more, a lot more, by then.

Even a modest 3% inflation rate will cause prices to be 34% higher in 10 years, 81% more in 20, and 240% more after 30 years.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing