July 2005 Newsletter

Budget Ignorance & Woes

(Excerpted from 6-2-05 Oregonian article by Adam Davis)

A recent statewide survey for Citizens for Oregon's Future found that Oregon voters as a whole are ill-informed about the budget choices our Legislature must make.

At least 8 out of 10 voters oppose cutting services to seniors and funding for K-12 education to balance the state budget. And more than half think the state spends "too much" on services other than education, public safety, health care and services to seniors.

The problem is, more than 90 percent of the state budget goes to the named services that voters clearly support and less than 10 percent goes to "other" services.

This poll is consistent with other research. The Progress Board has found that 85% of Oregonians do not know that the income tax is the primary source of state revenue and that education is the largest state expenditure. In the statewide Oregon Values and Beliefs poll ... conducted in 2002, only 59% of respondents mentioned education when asked what services ... government pays for — which means that 40% of Oregonians did not think of education as something their tax dollars pay for.

Once elected, politicians are stuck with the kind of choices the Oregon Legislature faces now: do legislators reduce services for seniors or funding for schools? Since voters aren't prepared for the idea that such tough choices are necessary, they conclude that their legislators are just incompetent.

When working with clients on retirement and cash flow planning, we often discover that some clients are suffering from Budget Ignorance at home. They may guess at what they need per month for living expenses when they retire, without having the data to back it up.

Your annual cost of living is a very critical factor in how long your money is going to last. We have done projections where the difference of $10,000 a year less in spending added over 15 years to the life of the portfolio! The numbers are especially influential when clients plan to retire early, and have to fund 30 or more years ahead.

Unfortunately, nobody likes the idea of having a budget or tracking their spending. Perhaps this is because we all have to make hard choices, just like our Legislature. And it is also difficult to forecast what we will want to spend money on five or ten years from now.

We have seen that it is very challenging to change a person's spending patterns. It is easy to say, "I need to spend this much now, but I will cut back later." But very hard to put into practice. Curiously, the flip side is also true: it is a struggle for some of our clients to spend more, after a lifetime of frugality.

There is no "right" number to spend every month, it varies for each of our clients. But there are long term consequences to the withdrawals we make from our portfolios. We have written before about a prudent portfolio withdrawal rate being three to five percent of the portfolio value to start, inflation-adjusted each year thereafter. This is designed to have a very high likelihood of the money lasting for 30 years.

Of course, there are different retirement time periods to consider, and most people spend more money in the early years of retirement while they are healthy and doing lots of traveling, than in their later years. Many people have money tied up in real estate that they plan to sell in the future, and some expect significant inheritances that will add to their portfolios.

The important thing is for each of us to educate ourselves as best we can about our own spending needs and patterns. You can input expenses in a program like Quicken or Money, making up whatever categories make sense for you, or just keep track on paper in a ledger book. You will probably need at least a year of actual retirement expenses to truly know what your numbers are going to be, since some current budget items will go up after retirement while others will disappear completely.

Then once or twice a year, you can run spending reports and see how you are doing compared to your initial estimates. You may find certain areas that are much higher than you expected, and can look at those more carefully.

Some clients have found it useful to design a retirement budget and actually living on it for a year before they stop working, to test how realistic their assumptions are. This can even include writing down and categorizing your cash expenditures, so you know where those ATM withdrawals go.

In reality, all of us will have to make hard choices about spending throughout our lives, unless you are one of the few who have a "champagne portfolio" and a "beer budget" (rather than the other way around!). Don't despair, remember that most everyone you meet is going through the same exercise!

The ultimate goal, of course, is not to have your money run out before you do.

"Do all you can with what you have in the time you have in the place you are."
Nkosi Johnson

Investment Boot Camp

Our next workshop on investment fundamentals and emotions will be:

Saturday, September 17, 2005
9:30 am to 11:30 am

Please call Jessi to register.

Schwab Update

Our Schwab representative was just in the office to tell us of the latest Schwab news. Here are items that may be of interest to you:

Schwab Bank: By the end of July, Schwab will transition all money market accounts to Schwab bank, which will mean some of us with Schwab checks will need to get new ones. Watch for the announcement.

Electronic Statements: Sometime this fall, Schwab will roll out the option of customers getting their monthly statement electronically rather than in the mail. You would initially be sent an email with a link to the website where you can view your statement, and print it if desired. Currently customers can get trade confirmations by email, which are sent as an attached PDF file.

If you would like your statements in this new format, please let us know or you can contact Schwab Alliance directly (1-800-515-2157) and make the request. Those enrolled in the electronic system will benefit from lower trading commissions on equities (but no change to mutual fund pricing).

Access Accounts: Some clients have asked about bill paying services with their Schwab One accounts. This service is only available with a Schwab Access account. Please let us know if you are interested.

Summer Schedule

Our office will be closed on Fridays throughout the summer, and staff will be coming and going on various vacations. Someone will be here or checking messages regularly, should you need us.

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