Couple Money » Retirement

Early Retirement? Maybe Not So Extreme…

Elle — Fri, 11 May 2012 12:08:40 +0000

It’s been pretty quiet over here with our finances recently. Once we bought the car, we’ve been building up our car fund a bit (to cover our current cars’ maintenance costs).

Our finances have been automated so we’re continuing to pay down the student loan and the mortgage while contributing to our retirement accounts.

I’ve been using the last month or so to catch up on my blogroll and my personal library. Among what I’ve been reading are Early Retirement Extreme (both the blog and book) and Mr. Money Mustache.

Could We Plan Our Retirement Differently?

After going over some of the numbers in the book and the blogs, I chatted with my husband a bit about this. For those who have been with us from the beginning, our goals have been fairly straightforward. Besides paying off all of our non-mortgage debt in 5 years (we have 2 ^1/2 years left), we also want both of us to have the option work to from home.(My husband enjoys his work, so it’s more about having an option rather than anything else.)

Our financial system is based on that – retirement was seen later rather than sooner. We thought about retiring earlier than average, but our thinking was if we enjoy doing the work that we, than why think about retirement?

However after some reading and thinking I’ve had a slight shift on my thinking. I was talking to my husband about some goals that we had (not just financial).

It’s given me some food for thought, so expect some future posts here starting next week (and on My Financial Reviews) about how this will affect our finances.

I’m going to spend part of this weekend looking some of the calculators for early retirement and look at the numbers.

Thoughts on Retiring Early

I’d like to hear about your family’s retirement plans. How many of you are working towards retirement or already are retired?

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Serious About Your Retirement? Open a Roth IRA

Elle — Tue, 27 Mar 2012 11:46:03 +0000

If you’re in your 20s, think about retirement may seem like a distant goal that you don’t have to worry about until later. For many there’s simply too much going on to worry about retirement such as:

Family obligations
Monthly bills
Student loans
Car loans

You could also be trying to build an emergency fund or possibly saving up for a house down payment. However if you get too distracted and wait, you’re making yourself financially vulnerable for retirement.

If you haven’t already, opening a Roth IRA can help you reach your retirement goal.

Roth IRA vs Traditional IRA- Which is Better?

When people look at IRAs, there may see two options- traditional and Roth. The main difference between the two IRAs has to do with when you’ll be taxed:

Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free.
Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income.

Sources: IRS Publication 590 and Wikipedia

For both types of IRA, you can contribute $5,000/year. Please keep in mind that these annual limits are per person. For example, a couple can contribute $10,000 total annually to their Roth IRAs.

I use a Roth IRA and send in my contributions through out the year.

Importance of Asset Allocation

The gist of proper asset allocation is maximizing your return while minimizing your risk. While maximizing returns seems clear, risk is subjective. Everyone has their own risk tolerance, so you’ll see different investors choose different investment vehicles.

A benefit of having the proper asset allocation is to fit your goals. Usually investors seek aggressive growth in the long term and shift to more stability of their money in the short term (i.e. for people retiring soon).

If you want a system that is easy to manage and has a track record of long term growth, you want to look for low cost index funds to put your money in. These are mutual funds that track a market index such as the S&P 500. They have low expense fees because they not usually actively managed.

Where to Open an IRA

Here are some places to consider for opening an IRA if you haven’t already started. The earlier you start, the more you can take advantage of compound interest.

Banks, brokerages, and credit unions also offer IRAs. Some charge a flat fee for the year, some take a fee for each transaction made, others can take a percentage, and some do all of this. Compare your options to see if you’re getting a good deal.

Deadline for Roth IRA Contributions

You can make contributions throughout the year. If you haven’t filed your taxes yet for 2011, you can also contribute towards your Roth IRA up until you submit your return.

Finding Money for Your Roth IRA

If you don’t know where you can cut your expenses to have money for your Roth IRA, I’m going suggest just one change to your budget that could potentially help you to make out your yearly contributions consistently – don’t have a car loan.

Did you know that the average car loan being around $26,300 ? With car payments $200 or more each month (depending if you have one or two car loans), if you redirect that money towards your Roth IRA, you’ll be able to reach your goals without having to make other changes to you budget. (Though, you’re more than welcomed to lower your expenses across the board.)

I’ve written how we’ve stopped financing cars and instead bought our cars with cash.

If you’re looking at getting started, check out my Betterment review and my guide to investing with a $1,000 or less. I hope the posts can help you create a plan that works for your own family.

This post is part of the Roth IRA Movement started by Jeff Rose of GoodFinancialCents.com.

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More People Preparing to Eat Dog Food in Retirement

guest poster — Tue, 17 Jan 2012 23:24:53 +0000

To make it through tough times more Americans have borrowed, stolen or raided their small retirement funds to make ends meet.

Loans from retirement funds jumped 20 percent last year. This really can’t be a big surprise to many. Faced with difficult financial decisions people will tend to gravitate towards the oath that seems easiest and less painful immediately.

It’s actually a classic example of hyperbolic discounting where a situation at hand today feels more urgent than one in the future.

The alarm over not being able to afford things leads people to make decisions in order to avoid more painfully imagined solutions like bankruptcy.

But what is actually more painful, a bankruptcy now that will take a couple years to overcome or retiring with little to no money left?

Logically an immediate bankruptcy makes the most sense. It allows people to discharge their debt, not have to raid the retirement accounts and actually leaves them better able to save for the future.

Along with setting themselves up to have to eat dog food to feed themselves in a future broke society, their poor debt relief decisions have left them unable to contribute as much to their retirement funds.

According to the Employee Benefit Research Institute survey, 27 percent of respondents said they are “not at all confident” they will have enough to retire comfortably. The reality is the actually number is much higher since acknowledgement would require people to overcome denial.

If you retire without sufficient income your choices are to continue to work, and most likely at menial jobs, or find a way to live for less.

The standard of life we expect in retirement may fall significantly short of what we will actually face.

At risk also are college savings for aspiring students. Parents already struggling to just make it month-to-month are having to cut back on their savings and are not able to put aside as much for college for their children.

The lack of college savings will require more student to either not attend college or go further in debt with dangerous student loans.

According to the College Board, students are already borrowing about twice as much as they did only a decade ago.

The more logical outcome to making these issues work is going to be to maintain a smaller or lower lifestyle than expected. That’s going to be tough for many people.

@GetOutOfDebtGuy

Author: This article was contributed by GetOutOfDebt.org, a site that provides free debt help and debt advice for people looking for answers.

Source: More People Preparing to Eat Dog Food in Retirement
Photo Credit: cw3283

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Can I Retire? Review

Elle — Thu, 13 Oct 2011 15:31:16 +0000

When I was at the Financial Blogger Conference last month, I got to meet many personal finance bloggers, representatives from banks and financial sites, and authors.

One blogger/author attending the conference was Mike Piper from Oblivious Investor. In addition to running the site he’s written seven personal finance book, including the one I’m reviewing today – Can I Retire?

Basic Book Info

Full Title: Can I Retire?: How Much Money You Need to Retire and How to Manage Your Retirement Savings, Explained in 100 Pages or Less
Author: Mike Piper
Price: $14.00

Can I Retire? Overview

What’s Inside

If you’re curious about what Can I Retire? covers, here is the table of contents:

How Much Money Will You Need?
Safe Withdrawal Rates: The 4% “Rule”
What if 4% Isn’t Enough?
Index Funds and ETFs vs. Active Funds
401(k) Rollovers
Asset Allocation in Retirement
managing Your Long-Term Bucket
Roth Conversions
Distribution Planning
Asset Location
Other Tips for Taxable Accounts
Finding Help With Your Plan

As you probably noticed right away, all of these topics are extremely important to retiring successfully. Mike doesn’t have fluff in this book; he jumps right into what matters.

Mike designs his book to be concise as his books are 100 pages or less. He has recommendations for those who want to investigate deeper with their retirement portfolios and plans. His audience are those interested in getting a quick grip on their finances.

My Highlights from the Book

First off I want to point out that I was able to read the book on the car ride back to our place. Mike’s writing is so clear and understandable that I was able to glide through the chapters. It really is a quick read and will allow you to either have enough knowledge to get your retirement setup started/adjusted or have an intelligent discussion with your financial planner.

I also appreciated how easy Mike made it for me to find more information about relevant taxes and why index funds and ETFs are a smart investment. I recommend getting a highlighter to mark off things you need to do once you’re finished reading. It’s packed with plenty of practical information.

Thoughts on Can I Retire?

I highly recommend this book for anyone looking at retiring in the near future. It’s a great way to become familiar with retirement planning and it may encourage you to look into further.

I love to hear from other readers and their perspectives on the book. Did you find it beneficial for your situation?

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How Much Do We Need to Retire?

Elle — Mon, 18 Apr 2011 12:00:32 +0000

When we did our taxes a couple years back, we were advised to contribute more to retirement. She explained to us that it could lower our taxable income and set aside our money for retirement. We’ve taken her advice and have been contributing towards our retirement. The problem was we didn’t have a hard core number to work towards. Instead, we set aside a percentage of our income towards retirement.

I started working on up on a number and I came up with a retirement number based on an estimated annual income of $45,000. It gave us an idea of what to shoot for, but it’s still just an estimate.

A few months ago J from Budgets are Sexy shared his retirement number that he received from ING Direct’s online tool. His turned out to be $2,6,52,343. Seeing as it was a bit of fun and we could get an idea of what we needed, I did it. When I completed the short survey, My Number (which was for both my spouse and I) was $2,546,875.

Curious about getting a number and a plan together, I started looking at the different pieces of retirement planning. I hope it’ll help you figure how much you need to save to retire comfortably.

Identify Retirement Expenses

I think the big question people have when trying to figure out their retirement number is how much they will need as a couple to retire. Of course that completely depends on your own family’s circumstances. However if you’re looking for some specific numbers to base your information on, here’s some information from one study done:

The ongoing Georgia State University RETIRE (Retirement Income Replacement) project, conducted for the federal Department of Labor, looks at the income requirements of households before and after retirement at three-year intervals. In 2004, the project found:

A single-earner couple making $30,000 annually needs 84 percent of that income, or $25,200 a year, after retirement.

A $50,000 to $60,000 single-earner couple needs to replace 79 percent of their pre-retirement income, or $39,500 to $47,400 a year.

A two-income couple needs to replace 84 percent of $30,000 a year pre-retirement ($25,200), 77 percent of $50,000 ($38,500) and 78 percent of $90,000 ($70,200).

A $90,000 single-earner couple needs to replace 82 percent of pre-retirement income, or $73,800 a year.

Source: LendingTree

While these aren’t bulletproof numbers, they can at least help you determine how much you need for retirement. According to the GSU study,we’re looking at having expenses that around 77% of our current income.

Identify Retirement Income

Since you now have a general idea of how much you’ll need on an annual basis, you should do an assessment of your expected income streams during your retirement period. I’m going to list the main ones people encounter, but if you have an additional income, please include it.

We do not have any expected windfalls or inheritance, so we aren’t including those in our calculations.

Social Security Payments

I’m personally a little leery of using Social Security as part of my calculations. There has to be a major overhaul of the program if it’s going to last when I retire. My assumption is that you’ll at least have to wait later until you can claim benefits. Since we’re planning on taking retirement before then, we’ll not be relying on these payments when working on our retirement contribution plan.

However if you’re closer to retirement, you may want to go ahead and include your expected Social Security payments into your calculations.

401(k)

A 401(k) is part of the US Internal Revenue Code that deals with retirement plans, and which defers the taxation of your retirement savings. One big benefit of some 401(k) plans is the employer match. Some employers will match a percentage of your retirement contributions – effectively adding free money into your account. That can help you as the money grows along with your contributions, speeding up the progress that you make.

Not every company offer this, but it is definitely to your benefit to check with Human Resources and see if your company does. You’ll also want to check to see if there are stipulation on your 401(k) matches, like a vestment period.

My husband’s job offers a 401(k) plan and a matching plan, which he takes advantage of. He had set up a portion of his pay to be taken out automatically be invested in his plan. He invests in some of the index funds offered with the plan. He started as soon as he could (when he became a permanent employee) and

Individual Retirement Accounts (IRA)

If you’ve never opened an IRA before, you should review some of the pros and cons of a traditional or a Roth account. The main difference between the two IRAs has to do with when you’ll be taxed:

Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free.
Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income.

Source: IRS Publication 590

I have a Roth IRA that I contribute towards. I invest mainly in various index funds.

Maximize Your Retirement Contributions

If you have the money, then look at maximizing your contributions. Here are some of the more common annual contribution limits for 2011:

401K – $16,500
Roth IRA – $5,000
Traditional IRA – $5,000

Please keep in mind that these annual limits are per person. For example, a couple can contribute $10,000 total annually to their Roth IRAs. Of course, if you have high interest debts, then you may want to hold off on making contribution on your IRA and only contribute to your 401(k) to get the employer match. With credit card rates around 20% and higher, it would be smarter to pay this debt first off first.

While you may be limited on what you can contribute now, you should plan ahead for when you can increase your deposits.

Developing a Retirement Plan

Now that there’s a general number, the next step is coming up with a plan to actually get started with investing for your own retirement.

Participate in 401(ks)

Like mentioned before, my husband has been regularly contributing to his account at work. Some personal finance experts suggest put 5- 10% of your paycheck. You can always increase the amount as you receive raises and promotions.

If your company an Employee Stock Purchase Program, you may want to consider participating. ESSP allows you to have some of your paycheck deducted to buy your company’s shares at a discount from its market price. Just remember to be diversified with your retirement fund and not too heavily invested in your company.

Contribute to an IRA

If your job doesn’t offer a 401, then you may want to look into opening an IRA. You have many options on starting one. Banks, brokerages, and credit unions offer IRAs. Some charge a flat fee for the year, some take a fee for each transaction made, others can take a percentage, and some do all of this. Compare your options to see if you’re getting a good deal.

Retirement Spreadsheets

If you really want to run the numbers for yourself,please check out some of the spreadsheet below.

Thoughts on Your Retirement Number

How many of you have come up with a ballpark figure on how much you need to retire? What tools have you used to estimate your retirement goals? Are you counting on Social Security for your retirement plans?

If you’re looking at getting started, check out my Betterment review and my guide to investing with a $1,000 or less. I hope the posts can help you create a plan that works for your own family.

Photo Credit: cw3283

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