PERSONAL FINANCE

Top retirement mistake: Thinking you'll spend much less

When that magic retirement day arrives will you suddenly spend less while reaping the benefits of your social security, pensions or investments? Yes, you'll spend a little less, but the hard truth is: The less you have, the less you spend. Most retirees have less.

According to the Census Bureau, out of 100 people who started working at age 25 and retired by 65, about 63 percent are dependent on Social Security, friends, relatives and charity. Just 4 percent have saved enough to pay for their retirement.

The US Bureau of Labor Statistics Consumer Expenditure Survey shows spending drops 14 percent immediately after retirement. Retirees spend less on work related items and food. Up to 53 percent of retirees experience some drop in spending at retirement. But 47 percent spend the same – or more. The reasons are simple:

• Retirees who imagine they will be better off at retirement are sometimes worse off and their spending goes way down.
  
  
• Retirees whose investments give them an equal income, spend more. They want to travel, shop, play golf, pursue their hobbies. All of that costs money that you did not spend while working. Add the cost of those activities to inflation, and after the average retirement length of 18 years savings will be stretched thin.
  

A paid off house can ease the strain of retirement economics, but the number of homeowners paying off their houses is dwindling.

For all retirees, housing and related expenses are the top spending category. According to the Federal Reserve Board, about 25 percent of families headed by someone 75 or older still had a mortgage in 2010. In 1989, just 5.8 percent of the same families had a mortgage.

Finally, don't assume you can continue to work into your 70s and save money for retirement. You might not be healthy enough and, in fact, about 25 percent of retirees are forced out of the work force for health reasons.

Successful entrepreneurs started with risk and accepted it as they grew

Most profitable start ups are not based on a new invention or an earth shaking discovery, according to Columbia University.

The same survey showed that start up founders were not wealthy. Most started with less than $100,000 in capital. They were not very big risk takers.

When Scott Cook left a successful career to start Intuit, he thought the worst thing that would happen would be that he would spend a few years paying off credit card debt which he thought he could handle. As with many successful startups, he wasn't the first to offer a personal finance product.

When he developed Quicken, there were already 46 such software products available. But his "exceptional execution of an ordinary idea" proved to be very successful. Keith McFarland, author of The Breakthrough Company: How Everyday Companies Become Extraordinary Performers, says there is a relationship between risk taking and a company's success. But it's not what you think.

Quoted in Time, McFarland says that as entrepreneurs become more successful there is a tendency for them to become more risk averse. When they get ahead of the game they begin to play it safe even when the odds say a bigger investment is likely to pay off.

One of the factors that distinguish breakthrough companies from those that fall behind is the tendency to continue to up the ante as risks grow. McFarland concludes that the only safe bet in business is the one in which a firm continues to play aggressively as the stakes in the game increase.

Banks offer new types of prepaid cards

J.P. Morgan Chase is now selling prepaid debit cards at its 5,541 branches. It is the largest bank so far to sell prepaid monthly cards which target consumers who don't want to pay the fees typically attached to regular checking accounts.

The new "Liquid" card has a $4.95 monthly fee and carries a Visa logo. Customers aren't charged to load money onto the card or to withdraw cash from Chase ATMs or tellers. They can also have paychecks deposited directly onto prepaid cards and use the cards to pay bills. That means a customer could pay less for the prepaid card than for a checking account. Chase charges customers $12 a month if they don't meet minimum balance rules.

Many other financial companies are promoting their prepaid cards including U.S. Bancorp, BB&T Corp and American Express. At BB&T they say sales of prepaid cards are exceeding their expectations.

Banks are attracted to prepaid debit cards, in part, because they are exempt from the recent federal law that roughly halved the amount they can charge merchants for accepting debit transactions. That means merchants must pay the banks more when a customer uses a prepaid card instead of a debit card.

At the National Consumer Law Center's Washington office they are glad to see banks offering prepaid cards as long as they are not a substitute for their duty to serve the entire community with traditional bank accounts.

Sometimes it pays to buy a new car instead of a used one

High prices for some small, fuel efficient used cars mean you have to carefully calculate the actual costs of the used car versus a new one. Vincentric, an auto data company, calculated the three year ownership cost for a new and a used Toyota Corolla LE, including depreciation, interest on the loan, insurance, fuel, maintenance and repairs.

Reported in Kiplinger's Personal Finance, the three year costs of a 2009 Corolla bought from a private party were $20,520. If bought from a dealer with a comprehensive warranty the used car cost rises to $22,015.

For a brand new Corolla, the three-year costs were only $20,944. When you factor in the higher price you'd get for your trade in, plus the costs of maintenance and repairs, the new Corolla appeared to be a better deal.

© 2013 TLC Magazine Online, Inc.