Raising Your Living Standard

What's it Really Cost to Live in Seattle?

In tough times like these, you need to know precisely the price you're paying for everything you buy. But knowing the true price of one of our largest purchases -- location -- is particularly tricky.

Will your living standard be 28 percent lower or only 5 percent lower if you move to Seattle with its cosmopolitan coffee houses, but rainy weather, rather than stay in Kansas City with its delicious Bar-B-Q, but scary tornadoes?

Should I Take My Pension in a Lump Sum?

Recently overheard on another financial website . . .

Question: "I'm 60 and have just retired. I have a pension that can pay me $760/mo. or a lump sum of about $120,000. I'm torn. Should I take the monthly payment format or the lump sum? It seems that I could take the lump sum and invest it elsewhere and do better job investing it. Right or wrong?" --Bill H., Birmingham, Ala.

Let's flesh this case out and see what ESPlanner suggests.

Shacking Up With Mom

Selma Jones and her only child, Roger, aren’t crazy about each other, but they share a common desire – obtaining a higher living standard.

Roger’s 35 and makes $60,000 a year working for a landscaping company. Roger owns a large home that’s feeling pretty empty now that his girlfriend Thelma’s left. Roger hates to cook, clean, and do laundry. He spends lots of money eating out and having his place cleaned and his shirts pressed.

Convert Your IRA to a Roth!

Since 2010 everyone, regardless of income, is eligible to convert qualified retirement savings into a ROTH IRA. Doing so will require paying taxes on the amount converted; i.e., the amount taken out of the regular IRA and put into a ROTH IRA. We will see below that the value of the conversion can depend on where you live but also, even more significantly, when you intend to take Social Security.

The Bottom Line is Your Living Standard

All personal financial planning questions, from Can I retire early? to When should I take Social Security? to What can happen if I invest in risky assets? boil down to the impact on your living standard.

ESPlanner is the only financial planning program that directly calculates your living standard and helps you achieve the highest living standard that your current and future economic resources can support.

Take the example of Jack and Jill Sprat, a middle-aged couple.

Basic Profile:
Jack is 51, Jill is 49
Their children have already graduated from college.
Housing: 25 years remain on their $350,000 mortgage. They pay $2,000 per year in property tax, $1,500 per year in homeowners insurance, and make a $2,255 monthly mortgage payment. Their last payment is due in 2033.

Retirement Dates: Jack 65, Jill 63 (year 2023)

Which Mortgage Should I Take?

John and Betty are very lucky. They are 30 years old; they just got married; and they have reliable jobs in today’s economy--earning $50,000 each. The couple has a 3 year-old and a 1 year-old. They plan to send their children to moderately expensive colleges and to retire at 65. They have a $12,500 in savings, plus $70,000 set aside for a down payment on a house.

When Should I Take Social Security?

For years the Social Security Administration urged retirees to take Social Security as soon as possible, even though doing so meant permanently receiving lower benefits. Here’s what they’ve said: “From an actuarial perspective, it doesn’t matter when you start collecting. But you may die early and regret (hopefully, in heaven) having waited, so don’t take the chance of dying before collecting. Take your benefits early.”

This advice and logic was as bad as it got. As far as we know no one has any regrets in heaven or needs any money.

Contributing to the ROTH or IRA

Huck and Molly Finn from Hannibal, Missouri are both 30, earn $50K each, have a modest home, plan for one child in 2010, target to retire at 65, and expect to earn 3% real (after inflation) on their investments.

Their employers offer regular and Roth 401(k) retirement plans, but no match. Both plans can save taxes. Contributions to regular 401(k)s or IRAs are tax deductible, but withdrawals are taxable. Contributions to Roths aren’t deductible, but withdrawals are tax free.

Order of Withdrawal

Roth and regular retirement accounts provide significant opportunities for saving taxes over your lifetime. But deciding how much to invest in each and which to withdrawal first is tricky without the right software.

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