• 03:19:17 am on October 28, 2008 | 0
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    How do I handle future purchases?

    Lee asks:

    You said”  take my one off purchases and list them according to 2008 cost estimates,then to figure what I’ll get for stuff I already own AND SUBTRACT THE TWO? Do you mean to subtract them from each other or the both of them from “Lee’s List”?

    Great question, Lee!

    Let’s say that you ‘own’ a house now and it’s worth $200,000 in 2008, but, you still have a $100k mortgage; by the time you retire (or even after) you expect to buy 2 new houses:

    1. One on your Date (let’s assume 10 years, here) for $400k in 2008 dollars to replace your current house, and

    2. Another in 20 years for $200k in 2008 dollars, as a second home.

    What we need to do now is ADD the new houses + inflation then SUBTRACT what your current house will be worth when you change houses (of course, after you pay off the mortgage).

    In this case your calculation will go something like this:

    New House 1 ($400k x 1.5 inflation) + New House 2 ($200k x 2.0 inflation) LESS Current house ($200k x 1.5 Inflation) – Likely Balance of mortgage ($100k)

    = $600k + $400k – ($300k – $100k) = $600k + $400k – $200k = $800k towards your Number.

    Now, I’ve made a few assumptions that you could easily challenge:

    a.  The ‘inflation factors’ assume 4% – 5% inflation for the next 20 years (closer to 4%), so may be a little shy of the mark, and

    b. It’s likely that you will have paid down some/all of that $100k mortgage in 10 more years, and

    c. The ‘biggie’: I’ve assumed that you need to have prepared the cash in advance for any purchases made AFTER you stop working …

    … this means that in 10 years the money should already be in the bank (or in other safe investments), 10 years (in this example) before you actually need to buy that second home.

    So, you COULD just inflate any post-retirement purchases until your Date (in this case multiply that $200k second home by an ‘inflation factor’ of only 1.5 instead of 2.0) because the money that you will have set aside for it 10 years earlier is also growing by inflation!

    So, for this example, I would be happy with anywhere between $600k and $800 for this part of my Number … split it down the middle and call it $700k? The choice is yours ….

    You can repeat the above exercise for any other ‘one off’ purchases.

     

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