The Chocolate Factor in Your Financial Future

By Colleen's Contributor, Lynn Torre

What does chocolate have to do with your finances? One of the most frequent questions I am asked is “How much money will I need for retirement?”   Often times, my response is “When do you expect to die?  This seems like a flippant question but it is the unknown factor when planning for retirement.

As I have mentioned before, I can crunch all the numbers – current income, future inflation, years before retirement, life expectancy, goals in retirement, current savings, longevity factors, expected investment returns etc….  But in order to come up with the magic number needed, one must assume that you will never outlive your money!

This is a daunting goal for most people.  My advice is to always contribute to your company retirement plan, especially if they offer a match.  In addition, you should fund a Roth IRA (if you qualify).  You also need to save beyond your retirement accounts, perhaps CDs, annuities and investments. The bottom line is that you need to save as much as you can for your future.

It is important to focus on having enough income during retirement.  The rule of thumb has always been to expect your retirement income to be 70% – 80% of your current income.  The theory is that you will no longer have to save for retirement (valid point), buy work clothes, pay for transportation costs to work, eat lunch out.

I have always disagreed with this guideline because if you hope to have an active and enjoyable life in retirement, you will not be sitting home watching TV.  My friends who have retired are busier now than they were when working fulltime.  Travel, dance classes, golf, tennis and yoga are just a few things on their lists.

You may want to travel, at the very least, to visit your grandchildren.  You’ll probably eat out occasionally.  Perhaps you may join a club/group that will provide some kind of physical activity.  You will still need new clothes, a car, gas for the car, and gifts for family and friends.  I will not even list what medical costs you may have.

BUT the most important issue that cannot be ignored is the increased cost of inflation over time.  Here is a chart of :

The Consumer Price Index from 2000 to April 2012[1]

Year

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Rate

2.8

3.2

1.6

-0.4

3.8

2.8

3.2

3.4

2.7

2.3

1.6

2.8

3.4

The Consumer Price Index (CPI) measures the purchasing power of the dollar over a 12 month time period.  Inflation is a measure of the cost of goods and services over time.  The CPI and inflation are one and the same but the word inflation is used when looking over a longer period of time.  In the last few years, we have been experiencing unusually low inflation. (I use a rate of 3.5% when running my calculations.)  Inflation eats away at our buying power.  Do not underestimate the importance of this statement.  Speaking of eating…

Let’s look at a real life example of the cost of something that most women cannot live without – CHOCOLATE.  Here is some historical data from the “Hershey Bar Index”[2] with year/ounces/price.

1980 / 1.05 oz / 25 cents

1986 / 1.65 oz / 40 cents

1991 / 1.65 oz / 45 cents

1995 / 1.55 ox / 50 cents

2003 / 1.55 oz / 80 cents

2011 / 1.55 oz / 99 cents

The cost of a Hershey Bar increased 296% from 1980 – 2011.  Yet it only increased in size by 50%.  The devil is in the details when it comes to inflation.  You must plan for the loss of buying power in the future.

I suspect you will start thinking twice the next time you grab for your favorite chocolate treat.  I know that I do.  Should you be saving that money for your retirement instead of putting those pounds around your middle?  How about breaking it into pieces, store most in the freezer and eat it over a week or month.  The fact is that planning for a healthy future and your financial future both take discipline.

[1] Source: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

2 Source: http://www.foodtimeline.org/foodfaq5.html#candybar