Now through November 8, Financial Planning Days are being held in cities around the U.S.  On those days, hundreds of CERTIFIED FINANCIAL PLANNER™ professionals will partner with local city governments and gather in designated schools, municipal buildings, and libraries to offer free financial counsel to area residents. 

In honor of the fifth anniversary of Financial Planning Days, consumers were asked to send in their financial planning questions. Here are those questions, and my responses:

Q. I'm getting ready to retire next [September] from Texas Schools. I worked 20 years before I started teaching at 45. Will I be able to collect both Social Security and teacher retirement from [the Teacher Retirement System of Texas (TRS)]? My husband plans to work as long as he can, he is 65 and I am 63. Can I collect spousal benefits from my husband if he gets more than my TRS? I would like to find a CFP® [professional] in the West Texas area that is fee-based and can help us [pick] an annuity for me where I can have [a] lifetime stream of money while the principal continues to grow and does not push a product for company, but is knowledgeable about the many tools that can help keep all we've worked for secure, growing and is interested in helping us secure our future as we age. 
–Holly, Denver City, TX

Dear Holly,

CFP® professionals look at every client situation as unique, but I must say that your circumstances are
very unique.  In fact, Social Security reports that only 3.5 percent of American households are similar to yours.

What makes you special is that your own Social Security benefit, as well as your ability to collect a spousal benefit on your husband’s covered earnings, may be significantly limited as a result of two provisions enacted in 1983: the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) rule.  The two provisions were adopted to prevent “double-dipping” by workers, such as you, who had some earnings where you paid FICA (i.e., Social Security) taxes, and some earnings where you were exempt from these taxes (i.e., your earnings as a teacher in the Texas school system).

Under WEP, your Social Security benefits on the work you did before becoming a teacher could be cut by as much as 50 percent.  Under GPO, your Social Security spousal (and survivor) benefits could be entirely eliminated.

Not a good way to be unique, right?  But fortunately you do have a way to mitigate their effect.  The WEP penalty is reduced for each additional year of FICA-covered work beyond 20 years.  At 30 years it goes away entirely.  It’s possible, too, that you can avoid the GPO reduction by choosing to work in the non-government sector (i.e., in a job where you again pay FICA taxes) for 5 years before you retire.  In other words, your solution consists of delaying your retirement.  You mention that your husband wants to work as long as he can.  Is this something you, too, might consider?

You absolutely need professional advice to determine the applicability of these rules to your situation and to develop strategies to avoid or limit them.  You mentioned wanting to find a CFP® professional in your area; you can go
www.letsmakeaplan.org which is the consumer website for CFP Board – the organization that certifies and supervises financial planners. You’ll find a search tool there that you can use to identify CFP® professionals in your area.  

Your professional should look at all aspects of your retirement question, including your desire to create a retirement stream of income while allowing your money to grow.



Q.
What is an appropriate guesstimate to use for inflation when you're planning for retirement in the next [two or three] years AND do you simply compound that rate yearly when making your plan? – John, Cincinnati, OH

Dear John,

You are absolutely right to be factoring inflation into your retirement planning, not just for the three or so years until you retire, but for all the years you will be retired.  Inflation will have a huge impact on what you spend during those years, which in turn determines how much you will need to have in retirement assets and how you invest those assets.

As for what rate of inflation to use, there are several possibilities.  You could use the widely recognized CPI-U, which is the Department of Labor’s annualized measure of the inflation rate for urban dwellers.  Alternatively, DOL has recently been experimenting with another measure that is intended to reflect the basket of goods and services consumed by older Americans: the CPI-E.  The two measures, CPI-U and CPI-E, have different weights for different expenditures.  For example, the CPI-E assigns greater weight to medical and housing expenses than does the CPI-U.

Be aware, however, that both these measures are retroactive: they describe what has happened to prices in the past measurement period, as opposed to what inflation is expected to be in the future.  It’s that future rate that retirees are concerned about.

One way to get a handle on expected inflation is to compare yields on long-term nominal Treasury bonds and inflation-protected Treasury (TIP) bonds of similar maturity.  In the case of “nominal” bonds – it’s assumed that buyers price the bonds (which determines their yield) by building in what they expect inflation to be, in order to protect the interest they receive from the bond from being eroded by general price increases.  In a TIP, buyers do not have to build inflation risk into the prices they pay for the bond, because future bond interest will automatically be adjusted for inflation.  So subtracting the yield of a 10-year TIP from the yield of a regular 10-year Treasury gives you an idea of what expected inflation will be for that time period.

A clue to the rates of inflation expected in the future can be found by looking at the level of interest rates on Treasury bonds maturing in the future.  Because buyers of these bonds are looking for a rate of return that will protect them from inflation, the market rates of return on these bonds can give you an idea of both the level and direction of inflation expected in the future.

There is, of course, the matter of unexpected inflation, which can also disrupt the best laid plans by retirees, particularly those on fixed income pensions.  Problem is, there is not a measure of this risk, because by definition it is not expected.

But enough of the theory:  what is the practical answer?  Currently the rate of inflation for urban consumers is about 2.4 percent.  Comparing nominal Treasuries to TIPS puts expected 10-year inflation at approximately 2 percent, and 30-year inflation at 2.1 percent.

So, it appears that both current inflation and expected inflation are relatively low. If anything, inflation in the future is expected to be lower than currently.

The advice I would offer to you is more-or-less a consensus figure of 3 percent used by my CFP® professional colleagues.  Being above current and expected inflation, it builds in some hedge against the unexpected.  And yes, you would want to compound that 3 percent annually, to estimate the cost of your future consumption.

Remember, too, that your investment strategy for the resources you have set aside can also provide some inflation hedges.  Over long periods of time, stocks and equity mutual funds are likely to keep up with inflation, as do certain real assets, such as real estate and commodities.


Q. What is the best way to pay off debt? Higher interest first or lowest balance? - Lori

Dear Lori,

The answer to your question is simple and straightforward.  Pay off the highest interest rate debt before the low interest rate debt.

Here’s the way to think about it.  If you avoid 10 percent in interest, it is equivalent to “saving” 10 percent.  So given a choice between saving 10 percent or 5 percent, which would you choose first?

I realize there are other methods for reducing debt that have become popular, such as eliminating the balances on low interest rate credit cards first, and then transferring your high interest balances to the low interest card.  This works only in special circumstances (i.e. when you have a lot of unused credit on the low interest card – more than what you are transferring) – so you are in effect refinancing the high interest credit that you have used.

However, there can be problems for the unwary with this method.  One, you may have to pay a transfer fee to move the balance from one card to another.  Two, you may get caught by “teaser rates” on a low interest card, where the rate goes up after a certain introductory period.  Three, it’s also possible that moving balances from one card to another can negatively affect your credit score. Four, moving your balances can disrupt your routine for paying your bills, if the due dates on the two cards are different.  This can lead to unexpected fees if you forget a payment, or don’t pay enough as a result of changing things around. Lastly, it’s easy to get comfy with keeping a balance on the lower interest rate card, which results in you continuing to charge things you can’t currently pay for.

Keep it simple and keep it effective.  Pay down that high interest credit first, feel the pain, and make a promise to yourself that with every payment above the minimum, you are working to prevent having to pay those high rates again.