Things To Consider When Retiring
- If you cant afford to lose money, invest your savings without the risk.
- Inflation is rising whether you like it or not. So plan accordingly or decrease your lifestyle.
- Per the U.S. Department of Health and Human Services, you have a 70% chance of going into a Nursing Home, Assisted Living Facility, or Home Health Care. So buy long-term care insurance now.
- There is a 100% chance you will die, buy affordable life insurance, or at the minimum, burial insurance for funeral expenses.
If you are close to transitioning to retirement, check our Retirement Planning Guide.
If you are not close to transitioning to retirement, check out our Guaranteed Retirement Income Guide.
Number 6 Substantially Equal Periodic Payments
I have talked about SEPP options to avoid the 10% 401K/403B penalty before. However, it is an option that you have to access money in early retirement before age 59.5
The IRS states that if you take payments as part of a series of substantially equal periodic payments beginning after separation from service that you can avoid the 10% penalty. The stipulations are the following:
- The payments must be substantially equal and occur after leaving your employer.
- They must not be altered or stopped for five years after payments begin or 59.5 .
- You must determine your payment in one of three ways: By calculating RMDs for your age, using it as an annuity, or via amortization.
The gist is that you can arrange for equal payments to occur for you from your 401K/403B for five years or until age 59.5 . This can provide some money, if you need some not covered by the four above.
Estimate Your Retirement Expenses
The first step is to determine the annual expenses you expect to incur in a comfortable retirement. This depends quite a lot on your lifestyle and personal needs, as well as where you live. A city dweller who rents will need to anticipate ongoing housing payments, for example, while a homeowner who paid off their mortgage will not. If you would like to travel and have adventures, that should be in the budget, while a homebody may need less cash on hand.
Dont just ballpark this. Instead, go over your bank and credit card statements. If you wanted to maintain your current standard of living based on how much money you spend today, how much retirement income would you need per year? Start there, then adjust based on reasonable expectations.
If youre young, dont forget that your standard of living will probably increase. And dont forget to account for insurance expenses during the seven years before you can enroll in Medicare. Finally, make a reasonable effort to estimate how inflation will affect your projected expenses.
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Basics: Whats The Problem
When we make all of our brilliant plans for early retirement, we often think about the freedom it will provide. Sometimes, however, we fail to think about the specifics.
Most people will use the 25X rule to determine how much is enough to retire, though I follow a hybrid model of financial independence. For the math purists, if your annual expenses come out to $100,000 post tax each year then you likely need $2.5 million to be financially independent.
If you plan to retire early, you may want to be more conservative and multiple your annual expenses by 30, or $3 million in this example. Then you could draw down 3.33% of this nest egg each year to provide you $100,000. That is likely to last a very long time based on the Trinity Study even for an early retiree.
However, this math gets a bit dodgy when the majority of our savings is stuck inside a retirement account that we cannot use until age 59.5 lest we receive a 10% penalty on anything we take out.
The problem is this: How do we bridge the gap from early retirement to age 59.5?
Retirement Age And Claiming Your Pension
Although you can retire at any age, you can only claim your State Pension when you reach State Pension age.
For workplace or personal pensions, you need to check with each scheme provider the earliest age you can claim pension benefits. If youre retiring because of ill-health you may be able to take your benefits before the set age.
If you have serious ill-health and your life expectancy is less than a year you can retire at any age. You can take up to 100 per cent of your pension fund as a tax-free lump sum. If youre married or have a civil partner, up to 50 per cent of the pension fund may be retained by the scheme. This will be used to provide for a survivors pension.
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How To Retire At : Major Considerations
Retiring at age 59 isnt like retiring at other ages. Particularly because of Social Security, its often more challenging than retiring at 62 or older. Of course, each persons own situation is unique to what feels like a near-impossibility to one can seem like a breeze to another. Here are some major factors to consider:
You Cashed In Your 401
Your retirement savings will take a big hit if you take money out of an IRA, 401 or another qualified retirement plan before you reach age 59 ½. Youll have to pay income taxes on the money, and youll probably pay a 10% penalty as well unless you used the money for certain qualifying expenses.
Youll also have to contribute more to make up for the taxes and penalties, making it that much more difficult to reach your goals. Make it a point not to touch your retirement savings until retirement.
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Can I Retire At 59 With 500k
Can I retire on $500k plus Social Security? Yes, you can! The average monthly Social Security Income check-in 2021 is $1,543 per person. In the tables below, we’ll use an annuity with a lifetime income rider coupled with SSI to provide you a better idea of the income you could receive off a $500,000 in savings.
Reasons You May Want To Wait To Roll Over Your 401
- Temporary ban on contributions. Some plan sponsors impose a temporary ban on further 401 contributions for employees who withdraw funds before leaving the company. You’ll want to determine if the gap in contributions will significantly impact your retirement savings.
- Early retirement. Most 401s allow penalty-free withdrawals after age 55 for early retirees. With an IRA, you must wait until 59 ½ to avoid paying a 10% penalty.
- Increased fees. IRA investors may pay more fees than they would in employer-sponsored plans. One reason: The range of more sophisticated investment options you may choose can be more expensive than 401 investments. Your advisor can help identify what extra cost a rollover may incur and if the benefits of the rollover justify those additional costs.
- Can take loans out. Your 401 may permit you to take out a loan from the account, but this is typically only for active employees. And you may have to pay in full any outstanding loan balances when you leave the company. You cannot take loans from IRAs.
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Building A Comprehensive Retirement Plan
Now that youve estimated what you expect to need each year of your retirement, adjusted for inflation, settled on how long you expect to live and added up sources of money, youre ready to put pen to paper and construct a plan.
If its clear that your sources of money will not support the lifestyle you have hoped for then you will need to dial back some of the wants you have had for a retirement. On the other hand, if your sources of money are more substantial than you expected you may be in a position to live more luxuriously in retirement than you anticipated.
Keep an eye on this plan it could need tweaking. Inflation may be different than you have calculated. Your investments may do better or worse than you estimated. Your healthcare needs may also increase, particularly if you end up needing long-term care. For reasons like this, its wise to work with a financial advisor as you create and update your plan.
Avoid Outliving Your Money
Whatever your age when you decide to retire, you dont want to worry about outliving your money. Luckily, there are ways to help avoid it.
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Should You Use The Rule Of 55
Determining whether or not to take early withdrawals under the rule of 55 will depend on your unique financial situation. Youll want to have a clear understanding of your plans rules, how much youd need to withdraw and what your annual expenses will likely be during your early retirement years. Figuring out those issues should help you know if taking an early withdrawal is the right decision for you.
Here are some situations where its likely taking early withdrawals would not be the right move.
- If it would push you to a higher tax bracket. The amount of your income for the year in which you begin the withdrawal plus the early withdrawal might put you into a higher marginal tax bracket.
- If youre required to take a lump sum. Your plan might require a one-time lump sum withdrawal, which may force you to take more money than you want and subject you to ordinary income tax liability. These funds will no longer be available as a source of tax-advantaged retirement income.
- If youre younger than 55. You might want to leave your current employer before a year in which you turn 55 and start taking withdrawals at age 55. Note this is NOT allowed and you will be assessed the 10 percent early withdrawal penalty.
How Long Will Your Retirement Savings Need To Last
Put bluntly, how long do you expect to live? Or to put it differently, for how many years will your nest egg need to provide for you? To retire at 58 you are essentially adding four, seven or 12 years to your retirement plan. While difficult to pin down, a conservative rule of thumb nowadays is to plan on living until youre 100. This may seem like a stretch, but nearly a third of all retirees live into their 90s today. As healthcare continues to improve, that number will almost certainly improve every year.
You can use the Social Security Administration life expectancy calculator above, but financial advisors recommend adding five to 10 years to the results, depending on how conservatively you want to plan.
Dont underestimate this. In addition to being less morbid, the risks of underestimating your own lifespan are serious. In your early retirement you can always try and go back to work, but in your 90s with failing health it will likely be impossible to do so.
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How To Retire Early: Felicity The Talented
Felicity graduates in the Top 3% of her class at UC Berkeley and gets a job at the Boston Consulting Group, one of the worlds leading strategy consultant firms. She has a fantastic career and gets promoted every 3-5 years on average until she becomes a senior executive at age 38. She has a couple little ones, and decides to retire at 40.
With a retirement savings of $1.36 million, Felicity can spend $68,000 after-tax a year as she stays at home and spends time with her 6 and 7 year old sons.
Felicity didnt have the best of luck with love, and divorced her $300,000 a year husband soon after the kids were born. They share custody of their sons, and also share the cost of raising them.
At a 2% risk free return, Felicity can generate $27,000 a year in interest income, boosting her annual spending to roughly $88,000 after tax. Felicity was living off of around $88,000 a year in disposable income at the age of 35, so its not that big of a stretch for her.
Consider Holding Out On Social Security
If you wait until age 65 to retire, youre probably pretty close to your Social Security full retirement age, which is between 66 and 67 depending on the year you were born. That means youre a stones throw away from when Social Security will pay out 100% of what youre entitled to.
If you want to stop work before your full retirement age, you might consider part-time work, or tapping your savings instead of starting your benefits before you hit your full retirement age. Consider consulting with a financial advisor to see if you might be able to retire when you want, but delay claiming Social Security until you are 70.
Social Security will increase your benefit by 8% for every year you wait to claim benefits between your full retirement age and age 70. Thats a guaranteed returnthats also inflation adjustedand you cant get that in any investment these days.
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Key Points To Remember For Early Retirement
1) Passive income is everythingif you truly want to live a carefree retirement lifestyle. Shoot to have as much in after-tax investments as you do in pre-tax investments by age 30.
2) Earning supplemental incomein early retirement is beneficial. Every $10,000 in supplemental income you make equals $250,000 in capital at a 4% withdrawal rate.
3) Dont underestimate the cost of healthcare and accidents. The average company pays $20,000 a year in healthcare costs for their employee. If you retire early, you will bear these costs as we do with our $1,700/month bill. Bad things do happen all the time folks! Think about sickness, aging parents, accidents, infertility treatments, and more.
4) The longer you work, the less you need. Your net worth starts to skyrocket the older you get due to the power of compounding. However, ironically need less money the later you retire. People suffer from the one more year syndrome all the time due to this fact. However, were living longer so either working longer or having more money is a must.
5) A safe withdrawal rate is between 3% 5%. The risk-free rate of return is now roughly 3%. Therefore, you can withdraw 3% from your after-tax investment accounts every year and never touch principal. Keep the maximum withdrawal rate at 5% if you dont plan on making any supplemental income in retirement. By the time you turn 60, your pre-tax retirement accounts will provide you an extra financial boost if necessary.
You Sacrifice The Power Of Compounding Interest
Time is your friend when you are saving for retirement, but not when you are spending. If you sock away $250 a month $3,000 a year from age 25 to age 55, youll have about $237,000 when you retire, assuming you make no withdrawals and earn an average 6 percent annually on your investments. Seemingly not a bad return on your $90,000 in contributions.
But lets say you work 10 more years and retire at 65. In that scenario, youll have about $464,000, nearly double. Why? The extra decades worth of contributions helps, but that only adds up to $30,000. The real growth comes from another 10 years worth of interest earned not only on all the principal you contributed but also the interest earned on the interest that has compounded for four decades.
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Your Children Still Need You
Some people postpone retirement because their children still need them. Having children later in life means they might not have finished college by the time you are 65 and might need your support. Or, they might be just starting families, and you want to be in a position to help them financially, which requires that you continue to work.
Understanding The Rules For 401 Withdrawal After 59 1/2
LAST REVIEWED Apr 15 20219 MIN READ
A 401 is a type of investment account thats sponsored by employers. It lets employees contribute a portion of their salary before the IRS withholds funds for taxes, which allows interest to accumulate faster to increase the employees retirement funds. Now, if you have a 401, you could pay a penalty if you cash out your investment account before you turn 59 ½.
Heres some more information about the rules you need to follow to maximize your 401 benefits after you turn 59 ½.
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How Much Money Do I Need To Retire At 55
Planning to retire at 55 is different from planning to retire at 65 or older for. This is true for one very important reason: Youll need more money to last you through your old age. If you were to retire at 65 and live to age 90, your money would need to last 25 years. But if youre retiring at age 55 instead, your savings now needs to be able to stretch for 35 years. And that assumes you stay healthy and dont require long-term care at some point, which could significantly drain your assets.
So how much money do you need to retire at 55? The short answer is that it depends on the type of lifestyle you want to have. If you plan to scale back and live a very minimalist lifestyle that allows you to keep expenses low then you may be fine with less money. On the other hand, you may need a larger nest egg if your early retirement plans include traveling, buying a home or starting a business.
When preparing a budget to retire at 55, consider:
- Your current monthly expenses