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Getting by on those pennies saved

Mississippi Musings

When I was in college, we suffered through meals that were served in the cafeteria. Mystery meat was the usual entree, coated with varying sauces, and accompanied by overcooked vegetables and undercooked rice or pasta. Our only salvation was the salad bar.

On Thursday nights, my roommate and I had a class on, of all things, nutrition. This was our evening to splurge. Before class, we hit the local McDonald’s where, for $1.26, we could buy a hamburger, small coke and an order of fries. Some days, we counted out the entire $1.26 in pennies to the patient cashier, but after cafeteria food, this was like gold!

Even with those wonderful “value meals,” $1.26 won’t buy you much at a fast food restaurant. You could probably get one item, but forget the whole meal. As I walk past a penny lying on the pavement, in too big of a hurry to bend down and pick it up, I hear the voices of my parents as they talk about paying a nickel to go to the movie, ten cent loaves of bread, and house payments that were less than $100.

Inflation, the real thief of our hard earned dollars. While it’s easy to see the effects of this beast when we look at the changes in prices over a long period of time, it’s harder to notice the incremental damage to our spending money. Prices gradually increase. We become accustomed to these changes in a slow way. And, before we know it, our mountain of money we’ve worked so hard to accumulate suddenly looks like a mole hill.

How do you prepare for tomorrow with today’s dollars? Overkill. Save for more than what you think you’ll need. Overestimate your monthly expenses, and underestimate the rate of return on your investments. Prepare for the worst and hope for the best.

Recognizing that a dollar doesn’t buy what it used to, Congress has made some changes to the IRA laws to allow us to put more aside for retirement. Through 2001, the maximum contribution for Traditional IRAs and Roth IRAs is $2,000. That’s $2,000 for each individual. You can still make a contribution to your 2001 IRA through April 15th of this year.

But in 2002, the contribution amount has been increased to $3,000 per person. If you are using a deductible IRA, this means getting an extra $1,000 of deduction in the year you contribute. If you are using Roth IRAs, that means sheltering an additional $1,000 from Uncle Sam as it grows for your retirement.

Either way, it means saving more for a time when you are living on a “fixed income” while inflation still plays havoc with your living standards. For those people who are over 50, they can use a make-up rule and tack on another $500 for a total of $3,500 for 2002. The make-up amount for 2003 will be $1,000 and will increase by $500 per year until it reaches $2,500 in 2006.

Because inflation will continue to be a part of the picture, the IRA

maximum contributions will continue to increase. In 2005, the contribution maximum will go up to $4,000 and will increase again to $5,000 in 2008. To cover further erosion, IRA limits will be indexed for inflation each year beginning in 2009 and will be adjusted in $500 increments. As for the catch-up contribution amount, it will be indexed for inflation beginning in year 2007.

All this means, that if you are over 50 in 2008, you could contribute up to $7,500 to your IRA account in that year. Wow! What an opportunity to save those needed dollars for retirement while protecting your money from the IRS! And you’re thinking, wow! Where am I going to find $7,500 to put into an IRA account?

Inflation. In 2008, $7,500 won’t seem like as big a stretch as it does now. And, remember, the erosion of your money as you age makes it important to put aside as much as you can now, while you still have some earning power.

I’m 43 years old now. When I’m 65, I can expect the effects of inflation (averaging 3% per year) to cause most items to be about double in price. That means the $40 for a decent meal out for two will cost about $80. A trip to the movies will run about $30 for two. My electric bill in the summer will be around $500. And that trip to McDonald’s for the barest of meals? That will cost about $7.00. Forget pennies! I’ll need to find a few dollars in the couch to make the trip.

Longing for the “good ol’ days” won’t magically increase the buying power of the dollars in your wallet. Instead, expect higher prices.

Prepare for inflation. And keep picking up those pennies. They’re not worthless… Yet!

Nancy Lottridge Anderson, CFA, is president of New Perspectives Inc. in Clinton. Her e-mail address is nanderson@newper.com, and she’s online at www.newper.com. Her column appears monthly in the Mississippi Business Journal.


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