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Archive for January, 2016

Disadvantages of Early Retirement

In today’s times, when work is causing excessive stress, an early retirement sounds like a comforting idea. It will allow you to find time for pursuing various hobbies which you wouldn’t have otherwise. Also, it can help you spend quality time with your family.

However, as you know, nothing in life comes for free. Hence, with the inherent freedom of early retirement comes a set of strong disadvantages which may deter you from opting for it. People who retire early need to have strong financial plans in order to support themselves.

Else, they may have to undertake a part-time job. However, this will not serve the purpose of early retirement. Apart from financial issues, you will also bear the burden of unhappiness, loneliness, insecurities, and feelings of being rendered redundant. You may also feel that you have been robbed of a purpose in life. This Buzzle article intends to inform you about several emotional, financial, and social disadvantages of early retirement.

Lack of Fulfillment
Often, our work and the appreciation we get for it motivates us to do even better. For example, a promotion at work not only boosts your financial situation, but also motivates you to put in your best efforts. Due to early retirement, you may miss the thrill of achieving various professional milestones in your life. You may feel extremely discontent and even jealous on seeing your colleagues and friends achieve success in their careers. All this will result in a severe lack of fulfillment.

It may so happen that you are a workaholic and like to spend time working. If, due to certain circumstances, you have to opt for an early retirement, it will cause a void in your life. You will direly miss your work and will want to spend your time by doing something constructive. You may feel totally redundant and dependent on others. This will lead to unhappiness and depression.

Monetary Issues
As you will no longer get a paycheck every month, it will definitely cause a deficit in your savings. Though you will get a lump sum amount during the time of retirement, you will still fall short on savings, as your expenses will also increase considerably. Just imagine how much more you would have earned and saved had you continued to work till your full retirement age. While you will not feel the financial brunt initially, as years pass, you may regret your decision of retiring early.

Though the idea of retiring early sounds interesting and favorable, you may be constantly worried about your financial situation. This is because, due to inflation, the prices of necessities and other things will continue to increase, and your savings will not be able to match their pace. This will lead to exhaustion of your savings some day or the other. Ensure you make provisions for the rising inflation rate as well as increasing expenses. This is because, the fear of living with limited or zero savings can constantly haunt you.

A person who retires early, lives in the fear of outliving his savings. Even if a person retires at the ripe age of 60 and lives up to the age of 85, he will have to support himself without any income for 25 years. The difference in the years will increase even further if you plan to have an early retirement. This means that in order to support yourself, you will have to undertake some kind of a part-time or work-from-home job.

Social Isolation
At first, you may feel good that you are now your ‘own boss’ and you don’t have to work for someone. However, with passage of time, you could find it difficult to while away time at home. Also, all your friends and relatives will be at their workplaces. This will make you feel lonely. Whenever you happen to meet your friends and family members, they will discuss about work, and you can feel out of place.

Social Security
An early retirement will definitely impact your social security payments. If you start drawing your social security at 62 years of age, you are expected to receive about 75% of benefits. This is a percentage of benefits which you would have received if you had worked till your full retirement age. Now, imagine what will happen if you are planning to have an early retirement, say at the age of 42. You may not even qualify for the benefits until a certain age. This means that you will lose out on a good amount of social security pay in the long run. Hence, the earlier you retire, the lesser will be the social security benefits.

Health Care Coverage
Today, the cost of medical expenses is really very high. If you have not planned your early retirement, then you may not have kept cash reserves for your health insurance. It is ideal that you know about your health care needs, and make provision for the amount of insurance premium. You will have to spend an extensive amount of your savings on health insurance, as you will qualify for Medicare only at the age of 65. If you retire even at the age of 50, you will need a medical insurance coverage throughout the time you live. This will require you to make regular insurance payments. Hence, plan your early retirement only after giving this a clear thought.

State Pension Benefits
The amount of pension payment is inversely proportional to the payout period. Hence, earlier the request, the lesser is the payout period, and vice versa. This causes an early retiree to suffer, as he gets lesser payments due to a long payout period. Apart from this, in order to access the state benefits, like national insurance and social security, you need to have a minimum age limit as stipulated by the norms. Hence, if you retire before the age of 60, 62, or 65, you will have no option but to depend on alternate sources of income until you reach that particular age limit.

Adjustments and Sacrifices
The early retirement picture may not turn out to be as rosy as you may have painted. You must have thought about a life of relaxation and leisure after retirement. However, it is said that post retirement, you should curtail your expenses in order to have a comfortable life. The amount of medical or household expenses will blow your expenditure out of proportion. This means that you will have to limit your luxury expenses and give up on those elaborate ‘once in a lifetime’ plans of buying a special edition car, traveling abroad, or getting a new house.

Lifestyle Changes
You may have thought about reducing your expenses after an early retirement. But think about it, now you will have plenty of free time to pursue old hobbies and interests. For example, you always wanted to learn a foreign language, but could not make time for it because of your work. Now, that you have the time and the will, you may enroll for language classes. This will add to your expenditure rather than reducing it. It will cost you more than what you had planned initially.

Control of Distributions and Early Withdrawal Penalties
If you want to avail for early retirement distributions, you will be charged with early withdrawal penalties. If you withdraw funds from a tax-deferred account before the age of 59.5, you will be subjected to income tax on the amount as well as 10% early withdrawal penalty based on the distributions. You may also have to pay additional penalty charges if you withdrew funds from annuity contract or certificate of deposit. However, there are a few exceptions to this, so analyze them before you go ahead. In order to avoid this, you will have to make substantial payments at regular intervals as stated by the IRC section 72(t). This will help you get annuity of payments from IRA or other plans until the money from your account gets over. However, this cannot be changed once the process begins. So, be sure about it.

Even if you think about getting a part-time job, it will not be an easy task to find a good one. Also, whatever you want will result in a higher income tax and reduced social security. It is advisable that you recheck your social security calculation. If you find that you will have to start drawing amounts at the age of 62, it is probably not a good idea to retire early. Now that you know the disadvantages of an early retirement, plan it properly, keeping all the aspects associated with it in your mind. There are many modes of income for early retirees, so try to explore these opportunities. Ensure that your early retirement is as pleasing as you have thought and does not make you regret your decision.

How to Plan a Richer Retirement

Aging seems like a hostile, foreign land to most of us, a country which scares the hell out of us. All our lives, we take desperate but formidable measures to keep its invasion at bay. However, those who find themselves in this strange country, realize that they are inadequately dressed and the life-saving compass is nowhere to be seen. As children and young adults, we are shown a grim picture of aging. We have been told, it is the period of life when you slouch and use a cane, and you can’t work a job or may not even able to tie the string of your pajamas. A life which is pretty much dependent on food stamps and government schemes.

From the eyes of a kid, old people are helpless and they need assistance. But do they really need help? We all know that it is pointless to argue with the inevitable. You can’t fight old age. You will be shipped off to that hinterland, whether you like it or not. Only choice you have is to decide whether you want to take your ‘to-go bag’ with you or not. So, you need to take the matters of your retirement into your own hands. There are no two ways about it, if you want to reap the benefits of your golden years.
“How much do I need to save to live comfortably during my old age?”

Well, there is no accurate answer to this question. It depends on a number of factors like the age at which you want to retire, your income, your expenditure, your investments, the standard of living you desire after retirement, the cost of living at that time, and any other unforeseen reason. But here’s a piece of good news. A professor at the American College, Wade Pfau, revealed the magical number of 16.6% which, he claims, is the safest bet while setting aside a part of your income. That, and putting the savings in diverse stocks and bonds, will get your retirement nest egg rolling. That might be true. Sure, crunching the numbers helps, it gives you a goal and takes you one step closer to the exit strategy. But there is another important question that you are ignoring. “When should I start for my retirement?” Ultimately, it all boils down to how and when you start building your nest egg. Here are our guidelines that will help you realize your do-it-yourself retirement plan.

Key to a Richer Retirement Lies in Early Planning
You need to be the proverbial early bird, not because there is a competition for your worm, but because starting your savings for retirement early, right in your 20s, will allow you to get valuable compound interest on your savings that will accumulate over the period of 40 years or more. Besides, you will generate the habit of saving for the future, and make do with the rest of your income.
For 20-somethings: Befriend Compound Interest and Long-term Gains.
A 20-something must be someone who has either just acquired a good paying job, or is dealing with student loans. Don’t rush to pay off all your debt at once, at the cost of your retirement savings. Because, time is the biggest asset that money can’t buy, and you need time to “marinate” your savings. Learn to balance it out. Pay up your rent and loan debt, but continue to live like a dorm student, and save every penny you can. That might mean no more misguided expenditure or luxurious trips to Europe. Of course, you can go backpacking to cheaper places. But the point is, to increase your savings, you got to limit your splurging.
Points to Remember
Besides limiting your spending, build your emergency fund. Typically, your emergency fund should have 4 to 5 months of living expenditure that will help you weather any storm.

Invest in the tax-advantaged savings plans that are offered by the government or your employer. 401(k) is a wise choice in such a case, as it allows you to lower your taxable income, and your savings pile up without the trouble of having to remember to make the deposits. If your employers provide you a match, then ‘lucky you’. 401(k) is a defined contribution plan. It may seem too good to be true but fortunately, it’s not. The only drawback is, you can’t touch your saving before you turn 59.5 years, unless you want to pay taxes on it and a 10% penalty fine to the IRS.

Roth IRA is also a good place to start your investment. Stash your money in this retirement savings account, and you need not pay a dime to Uncle Sam for this. You can also choose your portfolio of mutual funds and bonds to invest your money. If you are feeling uneasy because of the whole volatile market situation, you can begin with a non-risky option like money-market accounts.

Other options like 403(b) and 457 can also be taken advantage of.

For 30-somethings: Ramp up Your Savings and Don’t Let Debt Derail It.
So, you are good at what you do, and it seems you are going places with regards to your job. On the home front, you have started your family, but there is mortgage to pay. Maybe, there is a kid on the way. Even the dog needs more attention and food. In other words, you are swamped. If you are one of the bright ones who started contributing towards the retirement nest in his/her 20s, then you have little to worry about. If not, you need to accept the reality that it won’t get easier from here. So, gear up now, as it is time to fast-forward your savings.
Points to Remember
Assuming that you are making more than what you were earning in your 20s, now is a chance to make maximum annual contribution limits into your tax-favored retirement funds, such as 401(k). In 2013, this amount was raised to $17,500.

In your thirties, you may or may not get the benefit of defined benefits plans. Your retirement planning is pretty much your own responsibility. It’s not too late to opt for employer-sponsored plans like 401(k), IRA or Roth IRA. Begin by saving 10% of your salary.

Stay focused on the task. It is easy to get swayed by the rising responsibilities, but you need to trudge on. A personal budget will help.

Make aggressive investment moves, in order to reap maximum benefits. However, there is a risk involved. Asset allocation will determine the returns of your portfolio and help you beat inflation, as well as increase your nest egg substantially. Some stocks are relatively safe in the long run of 30 to 40 years. You can bet your money on them. It is important that you talk to a financial adviser to make sure that you are on track.

Maintain bold, but guarded asset allocation. Keep a track of your stocks. Never make the mistake of forgetting where you have put your money.

Leaving your job for a greener pasture is a good idea. However, make sure that you are not putting your tax-deferred plans at risk. Most of the time, people decide to opt out of the 401(k) plan instead of leaving it intact, when they leave a company. This, in turn, makes the money withdrawn from the plan a taxable income. You also need to pay a 10% fine on it. You can save a lot of money by rolling over the 401(k) plan into an IRA.

Then, there is the fine opportunity of getting fully “vested”, which is a kind of security feature for companies to retain their employees. Vesting is the period of time that an employee has to work so that the company will fully accrue his/her savings. If your employer is matching your contributions to the 401(k) by 100%, (that means, if you are paying $10,000 to the plan, your employer is also paying as much), then you must work for a minimum number of years for your employer, in order to avail the 100% vesting of your funds.

For 40-somethings: Start Now – Pronto
Halfway through your career, you are on the top of things now. At least till life comes into your way. By life, I mean the same-old, same-old – mortgage, kid’s college tuition, medical bills, rising debt, etc. Although you were late to warm up to the idea of setting up a retirement fund, all is not lost. It’s never too late to start saving your pennies. There are individuals who did their best, but found the chips they saved weren’t enough. Well, now is the time to rethink your strategy.
Points to Remember
At this age, people have plans for their future, not all of them concern money. Career switches are generally planned more thoroughly than retirement plans. “I will be leaving this writing job at 40, and become a freelance travel writer. By 50, I will author a book on my travel escapades.” If you are planning to leave a high-paying job for a low-paying, or which might not get you paid at all, you need to double or triple your efforts towards saving.

Don’t go overboard with savings too. Consider saving a trade-off. The more comforts (like a new car, or bigger house) you give up, the more you save. However, that doesn’t mean that you live a life of deprivation and find yourself resentful towards the whole idea of saving. The key is to save for the future, comfortably.

The latecomers can pick IRA for their retirement. Employee Benefit Research Institute or EBRI reports that 50% of individuals between 45 to 54, choose IRA over other plans to maximize their savings. A nondeductible IRA seems like a good choice for someone who is over 40 years of age.

Take charge of your balance sheet, and see where you stand financially. By now, you must have an idea of your target retirement age. Plan accordingly. If you are living in an area where the cost of living is more than your liking, it is best to relocate to a cheaper place.

If your kids have gone to college or left the nest altogether, you can consider downsizing to a smaller house. This way, you can stash away a nice sum of money for your future.

For 50-somethings: Create a Roadmap, Save like a Nut
Though past your prime, you are still going steady in this race. Of course, obstacles are abound. Your medical bills are rising. But the good news: the birds have left the nest. It’s just you and your better half. Now you are seriously tempted to take a break from the bedlam of city life and find a nice, cozy place in the countryside, perhaps. Hold on, your savings may not be enough to sustain through 20 to 30 years of retired life if you live up to the age of 80.
Points to Remember
Create a good support network. For myriad reasons, you need the company of people you love. Move closer to your kids or get connected to them emotionally.

You have to play catch up with your saving plan now. Even those who had a tardy start, need to review their liquidity options. Drop the all-or-nothing approach towards savings.

Consider fixed-income investment. Transfer some of the assets of your portfolio into less risky investment options. Now that retirement is just 10 or 15 years down the line, you need to play safe and not lose control over your money.

Reevaluate your insurance needs. Even though this is not a subject you would like to think about, you still have to decide how you are going to pay for nursing home or in-home care, in case you need it.

Don’t risk it with Certificates of Deposits, as they protect only the principal amount. Instead, go in for an array of bonds and stocks.

401(k) or 403(b) are still viable options for people who had a late start in planning. Traditional or Roth IRA will do the trick at this stage.

For 60-somethings: Ensure Your Money Lasts Till You Live
The fruits of your labor have ripened. Now, you only want to taste its sweetness. But, not so soon. You need a plan of action so that you don’t outlive your money. Experts suggest that you should withdraw only 4% from your savings in the first year after retirement. Plan how much you need, and meet up with a financial expert to get your portfolio assessed.

This can be a tricky decade. There are people who find themselves at a crossroad, unable to hang up their boots. You could be one of them. Nowadays, the 60ish individuals face different kinds of problems, unlike the previous generation. They are more likely to be still working towards paying off the debt, according to the Survey of Consumer Finances.

Points to Remember
Fix the date when you are finally quitting the rat race. If your health doesn’t permit you to work full-time, you can still contribute towards your savings by phasing into a part-time job.

Reassessing your housing plan is crucial to your nest egg. Moving into a cheaper house can free you from mortgage, or you can tap into your home equity to boost your savings.

See to it that your savings and withdrawal strategy are in sync with your retirement objectives. Also, keep saving. Have a contingency plan in place. There are provisions to catch up in several IRA accounts.

Focus on achieving security instead of growth with your portfolio investment, as it is time to maximize the benefits without risking it. Also, consolidation of your retirement accounts is a good idea at this time. This will eliminate the off-chance of duplicate investments, and reduce your load of paperwork.

Reinvent, before you bid farewell to your workplace. As the time to retire finally dawns upon you, you may need to prepare yourself for the big transition. To dispel the feelings of anxiety or sadness at this time, you can lean on the shoulder of your support system.
In short, by taking a comprehensive look at your finances, you can make a sound decision about your future. Even if you make mistakes regarding your finances, it’s wiser to catch up to them as early as possible before they spiral out of control. Work hard to make your dream retirement come true, or you can let it remain what it is. Just a dream.