A Roth Conversion Ladder Example
Lets assume youll need $50,000 per year when you retire. Lets also assume your Roth IRA will be the entire source of that income.
To enable you to be able to begin making tax-free withdrawals from your Roth IRA, you need to begin creating your conversion ladder by age 50.
You do this by making annual conversions from your IRA and/or 401/403 plan to your Roth IRA at $50,000 per year.
Once you reach 55, youll be able to begin taking annual tax-free withdrawals of $50,000 from your Roth IRA as a result of the successive conversions.
This is how it will work:
Whats especially convenient if you begin taking withdrawals at 55 is that those distributions will cover you straight through to age 59 ½. At that point, youll be able to tap other retirement plans penalty-free.
In the table above, weve shown Roth conversions continuing even after age 55.
But in truth, you may not need to make additional conversions after that point.
The ability to take distributions penalty-free after 59 ½ might make additional conversions unnecessary since youll just be transferring the tax liability from one stage in your retirement to another.
Can Too Many Early Retirees Affect Social Security
Regardless of when you retire, youll receive around the same amount of Social Security benefits over your lifetime. This is due to cost-of-living adjustments that attempt to protect seniors from inflation.
In other words, Social Security balances itself out. Early retirees receive lower monthly benefits over a long period of time while late retirees receive larger benefit amounts over a short period of time. Retiring early does not affect the Social Security programs finances because the amount of benefits available does not depend on how early or late someone retires.
Are We There Yet
So far, you have:
- $30,000 of income from Social Security and pensions
- $20,000 of withdrawals from your $500k in assetsignoring taxes, to keep it simple, but you may pay taxes in retirement
That leaves you short by about $2,000 per year. Plus, you might owe taxes on your $20,000 of withdrawals, which were ignoring for now. However, if you assume taxes of roughly 15%, thats an additional $3,000 per year you need to budget for.
So, what can you do?
The first thing most people think of is cutting their spending. Thats also the most difficult. If you can snap your fingers and spend $2,000 less each year, thats greatproblem solved.
How to Fix a Retirement Shortfall
Besides cutting your spending, there are several other ways to close the gap. None of them are ideal, but its smart to know your options in case you find yourself with expectations that cant be fulfilled . Several tips to help you retire are below.
Work longer: From the category of Least Popular Solutions, you can work longer. Doing so is surprisingly powerful:
Withdraw more: Using our example, you could take your chances and withdraw the extra $2,000 per year. The result would be a 4.4% withdrawal rate on $500,000 of savings. Thats a bit higher than the traditional 4% rule, but its not off the charts, and it could workespecially if youre willing to adjust your withdrawals in response to market crashes.
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Get Your Health Insurance In Order
It can be easy to take workplace healthcare coverage for granted after having it for decades. But when you retire, especially when you retire early, it involves a bit more work on your part. If you want to retire at 55, you have another 10 years before you reach the Medicare eligibility age.
Without Medicare, you could be taking a huge risk by going uninsured. You should check whether your employer can cover you into retirement. You may also be covered by your spouses insurance. There are a few possible routes you can take, but its important to have it laid out before you retire. That way you can correctly budget for the costs of healthcare.
How Much Income Will You Receive If You Retire At 55
To find out how much income youll receive if you retire at 55, you will need to create a retirement income plan.
A retirement income plan is simply your income + capital combined to fund your retirement expenses.
This is wherecash flow modelling comes in, it creates a forecast of your finances. It starts by working out how much you spend each year and then overlays this with the income you will receive. Once your income and expenses have been built in, the final step is to add your capital.
Yourcash flow report will show you one of two outcomes, either you have enough money to retire at 55, or you dont.
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Retire Early At 55 Me
However, for Canadians who are five to 10 years away from the average voluntary retirement age in Canada about 66 years old, according to Statistics Canada is early retirement feasible?
Absolutely, says Evan Hickey, a financial planner with RBC Financial Planning in Halifax. The trick is to build a flexible financial plan. Get a plan, check that plan and follow it ideally with a financial planner who can work with you, throughout the years, to help make your plan become a reality.
Mr. Hickey recommends answering the following three questions to determine the amount of money you require to live on in retirement, particularly because your money likely will have to last that much longer:
What will you definitely need to spend money on in retirement?
Make a list of lifes essentials think food, utilities, mobile phone, car insurance, clothing and house taxes.
What will you not be spending money on in retirement?
If youve been contributing to a Registered Education Savings Plan and your children are grown or they are now using the funds while in university or they have graduated, thats one expense to cross off your list. The same applies for a mortgage already paid in full. And dont forget smaller expenditures youll no longer need to open your wallet for: say, work wardrobe and commuting costs.
What new expenses do you foresee in retirement?
Start building your retirement plan with a budget
Consider options like part-time retirement
Why I’m Planning For An Early Retirement
I know plenty of people who want nothing more than to retire early. But I feel the opposite way.
The idea of retirement in general sounds a little scary to me because I’m the sort of person who likes to keep busy and doesn’t tend to do well with too much downtime. And so I’m hoping to keep working as long as possible.
In fact, ideally, I won’t ever really retire so much as scale back my working hours substantially. Doing so isn’t just something I feel will be good for my schedule — it’s also something that’s apt to benefit me financially.
While I’m doing my best to sock money away in a dedicated retirement plan, I also know that senior living costs can be exorbitant. And so I figure that if I’m able to keep working in some capacity, it can only help.
But while my goal is to either retire at a late age or technically not retire at all, I also feel compelled to plan for the opposite scenario. And you may want to do the same.
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Why You Should Want To Retire In Your Fifties
50 is a common age that people want to retire early at. 45 is another common target, and for the more ambitious, its 40. Yes, you can really retire at 40.
But as attractive as it can seem to retire that early, retiring at 55 can actually work much better.
There are several reasons why this is true:
Cautions On Early Retirement
Finances aside, there may be reasons to rethink retiring at 50. If you’ve always been a career-oriented person, a “type A” personality, or an over-achiever, and you have the funds to sustain an early retirement, you may want to think twice before retiring. You may find retirement enjoyable for a few months, but without a new project to work on, too much leisure time may become boring for you. Business owners and working professionals are those who are most likely to get bored in retirement.
Another thing to think about is your long-term health. In middle age, you may be vibrant and healthy, but in a few decades things might change. To have a successful early retirement, you should assume that your health needs and medical expenses will increase. To retire at 50, you need to account for the fact that your funds may need to cover 40 years of living expenses that won’t look the same as your current situation.
If your retirement fund has sufficient assets, and you wish to take money out without paying an early-withdrawal penalty, you may be able to set up 72 payments. This option allows you to access your retirement savings at any age without paying the early-withdrawal penalty.
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Break Down How Much You Should Be Saving Each Year
Now that you have an idea of how much you’ll need, you can begin calculating how much you should be setting aside annually.
One simple way to determine your savings goals is to aim for a multiple of your current annual earnings. While the actual amount varies according to your projected retirement costs and even the specific investments you choose for your retirement portfolio, these serve as a rough target and give you a better sense of where you stand.
According to Fidelity, here’s how much you should have saved up each decade in order to meet your retirement goals:
To reach these targets, many financial experts suggest a dedicated savings rate of 15% to 20% per year. However, you may need to save even more, depending on what retirement will look like for you, what sort of financial obligations you expect to have in retirement, and your current assets.
The sooner you start saving, the easier it will be to compound your savings and reach your goals by the time retirement arrives.
What You Need To Know About Early Retirement
Its a glorious spring day on Vancouver Island, and Patricia Robinson and her husband, Ron Sadownik, are relaxing amid the West Coast splendour. Robinson, a 55-year-old retired school principal, spent the morning finishing a watercolour painting while Sadownik, a 58-year-old former high-school drama teacher, worked on a piece of molten-glass art in his studio. In the afternoon, the couple went for their daily walk along the harbour near their home in Nanaimo, then returned to putter among the daffodils in the garden of their three-bedroom house.
There isnt a day were not smiling, says Sadownik. Early retirement is the best thing we ever did.
Thanks to a combination of good fortune and good planning, Robinson and Sadownik have managed to quit working a full decade earlier than many other Canadians. Will you be able to do the same?
The good news is that early retirement is possible not just for this lucky couple but for many of us. Sure, it takes a bit of financial discipline, and you may need to be creative in bridging the gap between full employment and complete retirement. But you dont need a million dollars to be able to quit working. So how much do you need? Join us as we show you how to plot your own escape from the working world.
Ignore the 70 per cent rule.
How much, then, should I save?
Can I count on CPP?
What other tricks are there?
What can I do now?
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Live On A Lot Less Than You Ever Thought You Could
With this strategy, youre creating the extra room in your budget to save money at an above average rate.
The less money you need to live on, the more you can save, and the more youll have available for retirement.
You can cut down a big expense just by refinancing your mortgage and paying it off early.
There are a couple of variables here, too. If youre really good at cutting your living expenses to the bone, you may be able to retire sooner than 55.
If youre coming to the early retirement party a bit late in life, cutting expenses will be even more important to reach your goal of retiring at 55.
Everyone talks about cutting living expenses, but exactly what does that involve?
And more specifically, how much harder do you have to work at it if you want to retire early? Naturally, itll be easier to budget if you make more money.
For example, if you make $150,000 per year, you can free up $30,000 for savings by cutting your expenses by 20%. But if you make $75,000, youll need to cut your living expenses by 40%, to free up $30,000.
Cutting expenses can be done on just about any income. After that, its mostly a matter of turning it into a habit.
If youre really serious about cutting expenses, to where youre considering selling certain assets, you can bank the proceeds. By getting creative, youll reduce some of the pressure on cutting your living expenses.
How Much Do I Need To Retire At 55
In the UK there are currently no age restrictions on retirement and generally, you can access your pension pot from as early as 55. How much you need to retire at 55 will depend on how much you plan to spend in retirement. As a general rule of thumb, youll need 20x your expenses in savings/pensions, less any income from other sources.
However, the earlier you start saving and investing, the earlier youll be able to retire. Working alongside a financial planner will help you work out if retiring at 55 is a possibility for you.
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Start Saving Into Your Pension Early
For David Lund, a technical sales engineer from West Yorkshire who retired at 55, its all about saving early.
He started saving into his pension since the age of 18. During his working life he was putting as much as a quarter of his income -between £45,000-£55,000 per year into his pension pot.
He tells i: Its more affordable than most people think. I was never on an exceptional salary but I started planning early.
I know plenty of people in their forties or fifties who only seriously started saving now and thats way too late. Its about being a bit smart and thinking long term.
Taking Money From Your Ira Or Old 401 At Age 55
Substantially Equal Periodic Payments is the option for early retirees to access funds in an IRA or old 401 before age 59 1/2 without incurring a penalty. But there are rules.
At a high level, you have the choice of one of three IRS-approved distribution methods. Your required withdrawal is calculated according to the method you selected. You don’t get to decide how much you want to take out and when.
The payments must continue for at least five years or until you turn 59 1/2, whichever is later. If you start a SEPP program at age 55, you’ll be able to stop at 60. Failure to follow the SEPP rules will trigger penalties and interest.
And keep in mind, distributions from traditional 401 or IRA are fully taxable as ordinary income. If the distribution is less than ideal, you’ll wind up with even less to maintain your lifestyle. If you’ve been at your job for a very long time and have a large account, the Substantially Equal Periodic Payments could leave you with little control over your tax situation and force you to take more from your tax-advantaged accounts than you need long before Required Minimum Distributions begin at age 72.
Another option that might be available in some 401 plans is the ability for individuals who retire between age 55 and 59 1/2 to take money from their account after theyve retired and separated from service.
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Want To Boost Your Score Here’s How
Here are some ways to boost your retirement readiness whether youre behind on your goals or are on track but maybe want to retire a little earlier.
“My score needs attention.”
An individual retirement account is one of the most popular ways to save for retirement given its large tax advantages. You can put in up to $6,000 a year. And if you’re 50 or older, you can contribute an additional $1,000 a year. » Learn more about IRAs
“On my way, but I could close the gap.”
The annual limit for 401 contributions is $19,500 . Its wise to at least contribute up to the point where youre getting all of the matching dollars your employer might offer. » See about increasing your 401 contributions
“I’m on track, but I want to do more.”
A good advisor can help you understand complex issues, diagnose potential problems and take steps to plan for the future. And theyre not as expensive as you might think. » Learn how to choose a financial advisor
How Much Do I Need To Save For Retirement
While it would be easy to just throw out a generic figure, the fact is your individual retirement savings target will be very different from your siblings’, your neighbors’, and even your co-workers’ goals. That’s because the amount you’ll need depends on a few key personal factors.
But there is one important rule of thumb that applies to everyone: The sooner you start saving, the less effort you’ll need to put in to reach your goal and the better positioned you’ll be later in life.
Here are four important steps to take to determine just how much money you’ll need to save:
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