Thursday, May 17, 2007

Another Milestone

"There's milestones on the Dover Road!"
- Charles Dickens, Little Dorrit

Today I went over $100K in my 401(k) account with my current employer. This is not too bad considering I have been here less than 4 years and I didn't roll anything into the plan from any previous employer.

Of course maxing out your withholding does help, but I have to give credit also to the 401(k) plan itself. The investment options are very, very good. I cannot begin to describe how ridiculously bad some of my previous 401(k) plans from previous employers have been. Fortunately, these have all been rolled over into IRA accounts now.

Tuesday, May 1, 2007

Milestones and Thoughts on Inflation

"You cannot do a goal. Long-term planning and goal-setting must therefore be complemented by short-term planning. This kind of planning requires specifying activities. You can do an activity. Activities are steps along the way to a goal."

- Alan Lakein

I've reached a new milestone this week.

I now have the dubious honor of having my monthly property taxes on my residence exceed my monthly interest on my mortgage!

I had often heard comments from retired folks about how after many years their property taxes eventually exceeded their original principal and interest payments. Now I can clearly see how this happens! We have a fixed rate mortgage (15 year at 4.25%) so our P&I is fixed, but the property taxes keep slowly inching up. So I suppose eventually our property taxes will reach that level as well.

Frankly, the steady increase in property taxes was one of things that made me realize that I better not assume a constant level of income after retirement. One of the ramifications of being frugal is that since your discretionary spending is fairly low, a lot of your spending will go to items that you really need, but those items will still increase in cost over time.

If your budget is somewhat extravagant, then you might be able to live on a fixed income for quite a while, because you could gradually eliminate a lot of unnecessary expenses to compensate for inflation. However, if your budget is already tight, there is probably less that you can do to compensate for inflation.

Suppose that you are very frugal as you enter your retirement years. Your home is paid off, you cook your own meals, you drive an older car, you do your own yard work, and you don't purchase unnecessary items. You may not need a very large annual income in that case. But note that nearly all of your spending is going to necessities, so there will be no easy avenues for belt tightening. Slowly but steadily, all of your necessities, from property taxes to toilet paper, are going to increase in cost. Over a long period of time, this increase can be quite substantial.

If you're planning on a long retirement, you'd better make sure you've factored inflation into the picture. Don't assume your frugality can always counterbalance inflation. The more you've already been frugal with your spending in the past, the less maneuvering room you probably have to cut consumption any further in the future. Hence, there is a need to assume your retirement income must eventually rise to adjust for inflation and to keep your general standard of living intact.