How are your Retirement Plans Going? Tips for a Brighter Future

All the experts tell us that the most important thing about a pension is to start saving early. But the reality is that many people, for plenty of good reasons, simply cannot save for retirement in their early working years. So what can they do to improve their prospects as retirement draws closer?

Start Where You Are

OK, so you didn’t start saving for a pension in your 20s. It is no good just bemoaning that omission. Now is the time to do what you can, not to worry about what you cannot change.

Start by having a good hard look at your finances today. Analyze your income and expenditure and work out where the money is going. Look for every way to divert money from unnecessary spending into retirement saving. There may still be more urgent priorities, like paying off credit card debts, but even a small amount put into a pension fund will get you going in the right direction.

Maximize Your Savings

Pension saving is a special category of finance, due to extra help that you can get from both government and employer.

If you pay into a 401(k) scheme through your company payroll, that money goes into your pension pot free of tax. Moreover, your employer may well make a matching contribution. There will be a limit on the amount of matching contribution the employer will make, and there is a limit on the total amount that can be put into a scheme in any one year, although over-50s can contribute an extra “top-up” amount.

It is well worth your while finding out exactly how much your employer will contribute, and take as much advantage as you can.

Instead of, or as well as, a 401(k) scheme, you might consider putting your money into an Individual Retirement Arrangement. These are not managed by an employer, so there is no matching contribution, but they are transferable between jobs and often have lower charges.

Using Your Home

If you own your own house, this is a good source of potential to help with your retirement. One option would be to downsize and to release some of the equity that you have. This can help you with your expenses (although it would be a finite resource) or be invested into a means to increase your income. Try to keep track of the equity that you have as you approach retirement.

Property can also generate income, for instance by taking in rent-paying boarders or running a small bed-and-breakfast business.

Saving on Your Car

As well as earning in retirement, you can make a hobby out of saving money. The costs of running a car are often underestimated by those who are used to a company car. A good way to build a rewarding hobby that will also save money is by learning how to maintain and repair your own car. Good manuals are available for all makes of cars; for instance, fans of Swedish technology who get hold of a Volvo service repair manual can do a surprising amount of their own work.

Continue Earning

Retirement is not necessarily a time to stop earning money altogether, but an opportunity for a new way to earn. If your retirement fund is not likely to keep you in the style you wish, now may be a good time to start preparing for a different work pattern—one in which you can be in control of your time.

Look at your hobbies, and consider if any of them can be turned into productive work. Artists, musicians, and writers may well be able to find work through the internet; people with experience in home maintenance will always be in demand; builders of toys may find a ready market locally.

Now is a good time to build your skills to a marketable level, and to plan the contacts you will need when the time comes.

Alternatively, if you have professional qualifications, you may find that you are in demand to work occasionally or part-time into retirement. Know whom you should inform of your availability—while you are still in the loop.

A New Start

Retirement is not the end of a working life, but a new phase. For a lucky few, that will mean a life completely relieved of the necessity to earn a living, but for many others, it is an opportunity to change gear, and to be productive in a new way. Maximizing your pension pot is a good start, but it is not the end of retirement planning.

How to Figure Out What You Need for Retirement

Retirement may be a long way off for you, but the years will pass by more quickly than you think. Unless you’ve already got a sizable chunk of change socked away, you are likely already behind in your retirement planning. If you don’t end up with the money you need by the time you retire, you may have other options, such as continuing to invest and striking it big or getting a reverse mortgage on your home. But the best thing you can do is start planning now so that you have more control over your retirement. Start by checking out these reverse mortgage facts.

But planning for retirement may seem like a daunting task. Where do you even begin? How do you account for all the variables? Here are some easy steps you can take to figure out how much you will need in retirement:

Calculate Years of Retirement

You can’t know how much you will need for retirement if you don’t know how many years you will spend in retirement. Start by figuring out when you plan to retire. If you’re like most people, you want to retire as soon as possible. But if you’re like most people, you won’t actually retire until the full benefit age of 66. Soon, that age will rise to 67. Eventually, it may rise even more. So if you are in your 30s now, you may be looking at a later retirement age in the coming years.

Next – and here’s the uncomfortable part – you need to figure out how long you are likely to live. Of course, no one can know this for sure. You may smoke every day and live to be 100 like your dear old granddad, or you may get hit by a car on your 67th birthday. The only thing you can do is figure out how long you are likely to live and use that for planning purposes. You can use a mortality calculator that considers your unique lifestyle factors, or you can just use the average lifespan in the United States, which is 79 years old. If you retire at 67 and will only live to 79, you need to plan to have about 12 years’ worth of income for your retirement.

Determine Your Needed Income

You won’t need to make as much money as you do now to support yourself in retirement – or, at least, that’s the idea. The general rule of thumb has been that you need about 70 percent of your current income during retirement. So if you make $100,000 a year now, you will need about $70,000 a year in retirement. Ideally, you would have your home paid off by then and you wouldn’t be supporting children or buying a lot of new things, like furniture and household goods. Therefore, you won’t need as much to live.

Compare Rates

Look at how much you have in your current savings or retirement accounts, such as 401(k)s or IRAs. Now look at the rate of return on those accounts and compare that to the rate of inflation. That will let you know how much the money will grow and deplete over time. For example, you may have an IRA that returns an average of 6 percent each year, which you can compound over time to see how much you will have at retirement age. But then you have to subtract the 3 percent inflation rate each year to see how much that money will actually be worth in terms of spending dollars.

Determine Monthly Savings Amount

Once you know how much you are likely to have from your current retirement accounts and your social security benefit (assuming it’s still there when you retire), you can figure out the deficit between what you will need and what you will have. Then you can figure out how much you need to be saving every month to make up the difference. Even if you can’t save all that amount each month now, you can start putting aside a little and build up to the full amount when your income increases.

Whatever steps you can take to save for retirement now will save you a lot of heartache later. Use these steps to figure out exactly how much you will need.

Financial Priorities.

First things first, apparently I’m a little late to the game, but I made a Facebook fan page last night for Punch Debt In The Face (See the new widget in the sidebar on the right?). I don’t really get why that’s better than my Facebook profile page, but for some reason people tell me it is. I also don’t know why likes are important on a page, but again, someone told me they were. Would you take a moment to head on over to my new fan page and gimme a little Likey Likey. If you do, I will…well… do absolutely nothing for you. Sorry, just being honest.

Alright, on to the content…

Do you have an income? Do you have expenses? If you answered yes to either of those questions, you darn well better have some financial priorities in place.

While there are a million different things we could talk about in regards to financial priorities, I want to focus on just one. Which comes first: investing or paying down debt? Hey, speaking of…

Which came first, the chicken or the egg?

Answer: Chuck Norris.

In all seriousness, I think financial priorities are something most of us think we have figured out, but don’t always truly understand. Today I’m going to show you why investing in your 401K is often a better option than paying down high interest credit card debt.

Let’s look at an example:

Jane, makes $50,000 year. She’s 30 years old and her employer fully matches 5% of any contributions she makes to her 401K plan. Jane also has $5,000 in credit card debt, at 15%. What should Jane do, pay down the card as quick as possible, or start building up a nice little nest egg for retirement?

A 15% APR, on a $5,000 balance, means Jane will be paying about $62/month in interest. If she made nothing, but minimum payments, it would take her a little over 22 years to pay that sucker off. She’d also pay $5,729 in interest over that time resulting in a total payment just shy of $11,000. Yikes, that $5,000 original bill became a whole lot more expensive. Better pay that sucker off ASAP, right?

Now let’s examine the investing route.

Jane would be investing $208/month in her 401K if she contributed 5%. Her employer matches that and gives her another $208. If she earned a doable 6% return on this money, and never got a raise in her life, she would end up retiring at age 67 with $683,030 in her 401K. Not bad at all.

If Jane decided to postpone contributing to her 401K, she could use that $208 to make accelerated debt payments each month. But let’s not forget, that 208 number is pretax, so in reality she’d have about $175 extra to throw at her credit card. With the additional payment, Jane will now be credit card debt free in 20 months and will have only paid about $673 in interest. Sounds a heck of a lot better than the 22 years it was going to take in the first example.

Here’s where it gets interesting.

Wanna know what Jane’s 401k would look like if she didn’t start investing until after she became CC debt free? She lost nearly two years of company matching and compound interest, resulting in $596,388 in her 401K. That’s $86,642 less then if she started investing at age 30.

Guys and girls, this point is SOOOO important it can not be overlooked. It is absolutely in Jane’s best interest to start investing in her companies 401K, even though she is not debt free. If she waits until she has her credit card paid off, she loses a crap load of money. I know this seems to go against the grain. Credit card debt is evil, don’t get me wrong, but that doesn’t mean it should always be at the top of our financial priorities.

Obviously, in a perfect world you will have enough discretionary income that you can not only contribute to your retirement, but also pay down your debt quickly. I always have been, and always will be a DEBT PUNCHER, but only when it is in your best interest.

Does your employer offer a 401K match? (I’d like as many people as possible to answer this question since I’ve heard a lot of the retirement benefits in the private sector have been getting cut left and right). Are you taking full advantage of that match? If not, you’re stupid. I’m sorry, you just are. You are literally giving up FREE money. In Jane’s situation would you go the way of Dave Ramsey and still pay down your credit card first, or would you let number’s guide you and start contributing to your retirement?

p.s. Like me on Facebook, I’m desperate 🙂

Retire early and withdraw from your 401k without penalty.

Remember that time I wrote a post about why I hate my Roth IRA and why I would probably never contribute to it ever again.

But then, like a week later, I wrote a follow-up post saying I still hate my Roth IRA, but I’ll probably keep contributing to it for the foreseeable future.

Or how about that time, a few weeks ago, when I wrote a post about having a ton of money available to me at retirement, maybe even too much?

But then my most recent post talked about how I was going to add even more to my retirement accounts, specifically my 401k.

 

This personal finance stuff can be confusing

What might sound good one week, may not be my cup of tea the following week.

With a government pension waiting for me on my 57th birthday, and social security kicking in shortly after, I’ve always just kind of resigned to the fact that I would work in to my late 50’s.

I mean, I’ll never make a huge salary in my line of work, so the idea of retiring early seemed like a foreign concept.

 

A Changed Perpective

But after reading J Money’s recent post on Early Retirement, and poking around with the spreadsheet he made, I found myself wanting to dig deeper.

According to J’s spreadsheet, if I change nothing about our spending (or saving) habits, I’m looking at being able to retire when I’m 45 years old. Check it…

early retire

Basically, the early retirement rule of thumb is you need to have 25 times annual expenses banked before you can retire.

Since our plan is to spend about $48,000 per year, we need $1.2 million stored away before I can call it quits. As soon as I hit that number, I can work my last day with reasonable certainty that I wont have to work ever again.

So the question remains, even if I had $1.2 million invested in my 401k right now, how could I possibly access those funds without paying the an IRS mandated 10% penalty for early withdrawal?

 

Introducing the IRS 72t withdrawal program. 

Without boring you to death, the 72t program allows an individual to withdraw an “equally substantial distribution” each year without paying a penalty.

Basically, if I have $1,200,000 in my retirement accounts by the time I turn 35 years old, I could take advantage of the 72t program and withdraw $56,420 from my 401k each year without paying a penalty.

There are, of course, a few catches to the 72t program. One of the most important being that you are required to continue making withdrawals until age 59 1/2 or for five years, whichever time period is longer. So no withdrawing some years, and not withdrawing others. It’s definitely a long term commitment for those that choose to retire early.

But hey, how bad can retiring early really be? 

Another big whopper for the program, is that if you modify your series of payments in any way, the 10% early distribution penalty is retroactively imposed on all money you’ve withdrawn. Ever. Yikes! That would be a very costly mistake.

Basically, once you pick an amount to withdraw each year (in this example $56,000), you have no wiggle room to withdraw any amount other than that from your 401k.

If you want to learn more about the 72t rule you can do so here

Some other things worth noting 

So far I’ve only been talking about withdrawals from my 401k, but as you all know, I’ve also been an avid contributor to my Roth IRA and most recently, a taxable investment account.

Having my retirement portfolio diversified across a number of avenues sweetens the pot. With the 72t rule and my example above, I was only allowed to take out $56,000 a year.

No more, no less. 

But what if I have Girl Ninja and I decide to buy a new car, or pay for Baby Ninja’s first year of college, or a potential future daughter’s wedding. Where is the money for those types of things going to come from?

My Roth IRA. Duh.

I’ll be able to use my Roth as a means to buffer any abnormal spending requirements. Because, as I’m sure you already know, Roth contributions can be withdrawn at any time.

Or in other words, I’d have about $75,000 of tax-free/penalty-free money accessible to me at any given time by my 35th birthday.

 

But wait there’s more. 

As you might recall from my post on Home Equity Lines of Credit, Girl Ninja and I have decided to stop keeping so much darn cash in the bank and begin throwing all our discretionary income in to our taxable investment account.

That’s right. Screw our savings account!

As our taxable investment account continues to grow, I can take advantage of all sorts of tax loop holes to to minimize my tax obligation on withdrawals, possibly even completely eliminating taxes altogether. Tax loss harvesting anyone? Or how about dividend investing? The loop hole list goes on and on.

Don’t believe it’s possible?

You’re wrong. Check out this inspirational blog post from a couple that paid NO TAXES in 2013.

 

It’s time you start drinking the kool-aid!

Like I said before, I’d always assumed early retirement was for two types of people.

Either the mega wealthy for obvious reasons.

Or

People like Mr Money Mustache, who live such a frugal lifestyle that they spend less than $25,000 per year. (editor’s note: Nothing wrong with the frugal and resourceful lifestyle, I personally am just not as interested in giving up my vehicle, moving to a cheaper cost of living area, growing my own food outback, etc. I’m lazy in that respect and am willing to pay the premium for it I suppose.)

Now that I’m digging deeper and getting in to some of the nitty gritty aspects of personal finance, my eyes are open to a whole new way of thinking. While I might not be retiring at 35 like the examples above, I could see 45, or maybe even 40 being a real possibility. And I don’t know about you, but that sounds a heck of a lot better than retiring at 57 like I’d always planned on.

 

P.S. I’m aware the future will obviously have some expensive seasons ahead (multiple children in high school, potential house projects, big family vacations, etc), but we will also have seasons of reduced expenses or greater income(paying off our mortgage, kids moving out and becoming self-sufficient, Girl Ninja going back to work, pension, social security, etc). 

Preparing for Retirement: Top Tips for Making Money-Smart Moves

For many in the UK, retirement is an anxious time. On the one hand, you can’t wait until you can stop working. On the other, you’re worried about living on a fixed income. You worry about your pension, your personal savings, your insurance, and what you’ll do about rising healthcare costs.

Here’s what you need to know to make smarter money moves and survive when it’s time to hang up your work shirt forever.

Scoping Out Your State Pension – What You Need To Know

Your state pension is the minimum amount of money you’re entitled to during your retirement. You can claim a state pension when you reach your state pension age. Check out when you’ll reach that age on Gov.UK’s state pension calculator.

You can also consider putting off your claim if you want to stay working longer. This deferral of your pension accumulates your pension benefits until you’re ready to retire.

Buy More Life Insurance

Most people don’t think of buying life insurance as a retirement strategy, but it’s a secret that big banks and hedge funds employ all the time. For the individual retiree, the reasoning stems from a somewhat forgotten approach to financial planning taught by Dr. Solomon Stephen Huebner at the Wharton School of the University of Pennsylvania in America, during the early 1900s.

His concept of Human Life Value stated that an individual should purchase permanent life insurance to fully insure the value of his life – forever – and that human life is the ultimate property, and source of all other properties, which needs infinite protection.

Just as one does not ever reduce the amount of home insurance, auto insurance, or liability insurance over time, regardless of one’s bank account size, one should never reduce the amount of life insurance in force on one’s life.

And, because permanent life insurance includes cash surrender values, it can be used to supplement your pension benefits at retirement.

The cash values in a life insurance policy grow at guaranteed rates, are tax-free, and participating or “with profits” policies pay dividends which may be used to supplement other income sources.

If structured properly (you should talk to a life insurance agent about this), your policy will provide significant protection against stock market losses or corrections, give you options to draw an income during a recession or depression, and the savings component of permanent insurance is accessible for any reason during your lifetime.

Consider a Lump Sum Annuity

When you retire, it’s tempting to take your pension as a lump sum. And, in the UK, you can withdraw up to 25% of your pension pot for this purpose. But, what should you do with it? That depends on your total financial plan.

However, a popular option is to annuitize the lump sum.

Annuitization means that you exchange your savings for guaranteed monthly income. You no longer have access to that savings, but you do have an income you cannot outlive.

Make Smart Cuts

The important thing here is to make cuts in your lifestyle that will not interfere with your long-term goals or activities which you have been planning a lifetime for. Many people get to retirement and suffer from a condition where they are tasked with reducing their lifestyle.

This is something that most people find unappealing for obvious reasons. Because you’re not making an income subject to regular raises anymore, some smart cuts are in order. But, those cuts shouldn’t interfere with your ideal life.

In most cases, this requires a little creativity. If part of your retirement plan was to travel, for example, you could compromise on the size of your home, selling it and rent a flat in a low-cost neighbourhood.

Or, at least buy a smaller home.

Then, you could travel in relative freedom with the money from the sale of the house, or at least part of that money.

Another way to save money would be to not travel. If travelling wasn’t part of your retirement dream, then you could work on other ways to cut expenses. You could still downsize your home, but perhaps you could also buy a bicycle and sell your vehicle.

This will help you stay active and reduce transportation costs.

If you can’t ride everyday, you could downsize your vehicle by buying an older model or work out a ride-sharing agreement with a friend of relative. Or, pay for ride-sharing through any of the popular ride-sharing services on the market now.

Joel Rowe works in the personal finance industry within the pensions sector. He has growing concerns on the futures of baby boomers and likes to write on the topic in the hopes of helping people live better lives once they reach retirement.

This is why you buy when the market is breaking records

The Nasdaq hit an all time high yesterday, ending the day at 5,056. The previous record dated back to March 10th 2000, when the index was at 5,048. As you can guess, the previous record was set shortly before the dotcom crash that sent the Nasdaq down nearly 4,000 points to 1,114 in 2002.

The S&P 500 set an intraday high yesterday, but closed just a few points shy of a new record.

Looking at the Dow, we find an equally bubbly story…

Screen Shot 2015-04-23 at 10.33.58 PM

The low in 2009 was 6,626. Today we’re at 18,058. That’s an insane roller coaster that has been climbing aggressively for the last six years.

THIS BUBBLES GOING TO POP! 

But guess what. You should probably keep investing in the market anyways. In fact, this is the exact way the market is supposed to work. Although there are peaks and valleys, the market trend has always been in an upwards direction. ALWAYS.

Sure, we have a recession (or depression) every decade or two, but these occasions are always followed by a lengthy period of gains. For every two to four years of losses, we average five to ten years of gains.

The market highs are getting higher, which means the lows get higher too when the crash finally comes. It’s a beautiful thing.

WHY you BUY in a bubble. 

In June 2013, I wrote a post titled I might take out a $30,000 401k loan just to piss some of you off. I was thinking of borrowing from my 401k and one of the primary draws was that the market was trading at all time highs (the Dow was at 15,000 for the first time ever). Why wouldn’t I want to lock in the sexy appreciation I had earned?

Fortunately, I was too chicken to take out the loan. Thank goodness considering the market has shot up another 20% since that post.

No one can time the pop.  

The problem isn’t with identifying when the market might be in a bubble. It arguably is right now.

Problems come when you try and preempt the bubble’s pop. You could sell today thinking things are crazy overvalued, only to find out this gravy train goes on for another three years before there is a correction.

This is why I need to constantly remind myself that I should think about my investments like I think about my marriage.

To have and to hold from this day forward. 

In sickness and in health. 

In good times and bad times. 

For richer or poorer. 

Until death does us part.

I will contribute to my investment accounts. 

You NEED to know your expense ratios.

throw money in toiletNow that I’ve given our savings account the cold shoulder in hopes of building long-term wealth via our taxable and retirement accounts, basic investment strategies just wont cut it any more.

The need to go deeper.

In 2007, when I landed my current job with the Feds, I was handed a fat stack of HR paperwork as part of my new hire packet. One of the pieces of paper in this stack asked if I wanted to begin contributing to the government’s version of a 401k, known as the Thrift Savings Plan (TSP).

The paper told me that if I contributed 5% of my salary, the government would match that contribution and throw in an additional 5% on my behalf.

I didn’t have to be a savvy investor to know that a 100% return on investment was an incredible opportunity.

The TSP is nice in that it only has five funds that one can choose to invest in. They are…

  • C Fund: Essentially an S&P 500 index fund
  • S Fund: A total US stock market index (so companies the S&P doesn’t cover)
  • I Fund: An international fund that mimics a Morgan Stanley International fund
  • F Fund: A broad index representing the US bond market.
  • G Fund: A guranteed return fund. Currently about 2% ROI. 

For all of the bureaucratic red tape and politics that comes with the government, you sure can’t beat the simplicity of the TSP.

But the thing that puts the TSP miles ahead of the competition, likely even your 401k plan, is the expense ratios.

If you’re a super passive contributor to your retirement accounts you might not even know what expense ratios are.

Without boring you to death, expense ratios are a fee that you pay the organization that manages your investment account. You may not have known these expenses existed because you don’t pay them out of pocket, instead your organization just debits them from your account.

Know your expense ratios. 

It could literally mean the difference of tens (or hundreds) of thousands of dollars over the course of your accounts life.

For example, the TSP charges expense ratios of 0.029%. Or in other words, for every $1,000 you have in your TSP, they will deduct 29 cents, annually.

Whereas, if you have an actively managed account, it isn’t uncommon to have expense ratios of 1%, or in other words $10 is deducted for every $1,000 invested, annually.

Ten dollars a year might not seem like a lot, but OH BOY does it add up quick.

Impact of Expense Ratios over the long term

For the sake of making everything easy, let’s say you have $100,000 in your 401k right now. You add $10,000 to your account each year. You are planning on earning an 8% return on investment over the next 30 years.

Take a look at how an account with a 0.030% expense ratio absolutely DESTROYS an account with a 1.0% expense ratio.

Screen Shot 2015-03-04 at Mar 4, 2015, 10.30.57 PM

So while a 1% expense ratio may not seem like a lot up front, man-oh-man does it cost ya big bucks in the long run, $419,181.44 to be exact.

Why pay an organization $420,000, when you could keep all that money for yourself? 

I’m fortunate that the TSP has insanely low expense ratios. It would be stupid of me to not contribute as much as I can each year to take advantage of the low fees (hence the reason I’m hoping to max my contributions this year).

And the good news is, even if I quit working for the Feds, I still get to keep my TSP. This will be one account I will probably never get rid of.

“But Ninja I don’t work for the Feds.”

You ever heard of Vanguard? Of course you have! It’s universally known as being one of the most legit investing institutions in the universe (think the Costco of investing).

Vanguards expense ratios are really cheap compared to most of their competitors (although still two to five times that of the TSP).

The more money you have, the better rates you will get.

From 2007 to 2014, I was contributing to VTSMX, which is Vanguards version of a broad based stock market fund. The expense ratio was 0.17%. Not too shabby.

But now that I’m committed to not being such an investing dummy, I’ve sold all $30,000 of that fund and bought VTSAX, which is EXACTLY the same fund, but has an expense ratio of 0.05% (1/3 of VTSMX). The catch with VTSAX is that you have to have a minimum of $10,000 to invest in this account to qualify for the cheaper fee.

Had I left my money in the more expensive VTSMX, I would have paid $22,000 more in fees over the next thirty years.

THAT IS SOOOOOOOOOOOOOOO STUPID. 

So, seriously, if you haven’t thought twice about your investment (taxable and retirement) accounts’ expense ratios; you need to get off my web site and start doing some research (especially because your employer might have some really sucky options).

Not doing so could LITERALLY cost you a fortune.

*make sure you consider tax implications on realized gains if you sell investments from a taxable account.