Category Archives: Funding Retirement

Retiring Soon? Prepare For The Coming Retirement Twilight Zone

Budgeting, Funding Retirement, Retirement Plan

Once the date is in sight there are some pre-retirement must dos. Whether you are prepared for it or not, once you skip out your employer’s door for the last time you will be entering the retirement twilight zone. A place where you are neither here nor there. It’s a place in the middle ground between employee and retiree. Unnoticed or unaccounted for, it can disrupt what could have been a beautiful experience and cause us to kick ourselves for missing it.

In the weeks before retiring there is much on our minds. We occupy our thoughts about controlling our happiness and trying to make sure we get everything at work done or handed off in time. All our years of retirement planning are now set into motion and being realized. However, in the weeks before retirement there are a few details to manage. Little details that are easily overlooked until it becomes obvious that we should have paid closer attention to them. It’s about small picture things that if missed have financial impacts and possibly having a large annoyance factor during a time when we just want to celebrate and start our next phase of life.

Retiring Soon?  Prepare For The Coming Retirement Twilight Zone

Photo by Aziz Acharki on Unsplash

Countering the Retirement Twilight Zone: Easily Overlooked Moves In The Weeks Before Retirement That Should Be Managed

So much of our lives is on autopilot. We get scheduled paychecks, bills are due on certain dates, and we pay little attention to details because as long as things remain static, it all works out. But retirement is a change to things. A big change. Autopilot will no longer apply and assumptions can sting you. The moment you walk out the office door for the last time everything changes. Even though you and everyone in your orbit knows you are retired, the rest of the world hasn’t got, or shall I say, processed that memo yet. You are in the retirement twilight zone. Here are some things to add to your checklist in the weeks before retiring.

Start By Having Enough Cash Available

Do you have enough cash available to cover your retirement funding for up to 3 months? This is all about being able to transition your bill payments during the start of your retirement. Your retirement twilight zone time-frame may not last 3 months, but depending on your unique circumstances it just might.

We usually plan intensely and way ahead for our long-term retirement funding. We know what income to expect coming to us and what our budget is or will be. The problem is that a lot of the systems and processes we will depend on to make it happen takes time to implement. Although most of us get paid in the rears and will at least get a partial paycheck after retiring, maybe even some unused vacation time, it may not be enough. We need to have readily available cash to cover this retirement twilight zone while we are still transitioning from employer paychecks to our retirement funding to keep our bills paid. The time when this digital financial world sees us as neither here (employed) nor there (retired). We’re in the in-between place and it takes having enough cash to get through it. 

Give Attention To Your 401K

This autopilot retirement savings platform will come to a crashing halt no matter what you do. But there may be ways to leverage the most from of it if your plan was to roll it over to an IRA. If you get a company match, do you know when that match is made? Is it with each pay period or at the end of the month? Does it depend on your employment or just having an active 401K account? Are there special rules associated to retirement like prorated match, etc?

Use the weeks before you retire to check. Find out and set a plan. Don’t do anything like closing it out too early with a rollover and causing you to miss a match-payment. If you have no 401K match to gain, make an active decision whether you still want to contribute to it on your last paycheck. Decide if getting that extra cash on your last paycheck is more beneficial for your short-term retirement twilight zone funding. If retirement account rollovers are part of your long-term retirement funding strategy, then be aware that it can take a week or more to complete everything in order to begin your retirement funding plan.

Auto Account Debits Need Looked At

Many of us have automatic debits against our savings or checking accounts to fund all kinds of things. I had a monthly debit to fund both mine and my wife’s Roth IRAs. That and auto transfers from my checking account where my paychecks were auto deposited to my savings account. It’s necessary in the weeks before retiring to make a conscious decision to look at our autopilot account debits. Decide whether to conserve immediate cash or stay the course to continue funding or top-off the other accounts.

Will You Be Depending On A Pension?

It is a fortunate thing to have a pension to help fund our retirement. But many have some very detailed rules and long processing time-frames. If you are depending on that monthly pension check then your retirement twilight zone is certain. Don’t assume a seamless income experience. Expect neither a paycheck nor a pension check for a period of time. Find out every detail about your plan’s retirement processing.

For example, the company I worked for had rules like the first pension money would be released on the last day of the second month after retirement. Ok, we’re on our own for 2 months. But it also said that any retirement pension request processed after the 15th of the month would be considered processed in the following month. What!!? So, depending on what day you sent in your paperwork you may have added to your retirement twilight zone time-frame.

Even Social Security has some processing lag time. In the weeks before your retirement reaffirm your knowledge of your pension plan’s ins and outs and strategically send in your paperwork.

Health Insurance Transition

Do you know when your employment based health insurance ends? Most plans end on the last day of the month you retire in. If you retire at the end of the month, then you need to be ahead of this since you will immediately lose coverage. You may need to apply for your company’s Cobra benefit to bridge past your retirement twilight zone. Even Medicare takes time to begin if you were in job lock waiting for your eligibility. Know when your new retirement health insurance coverage will begin. Also, don’t forget to use up your Healthcare FSA (Flexible Spending Account) money before you retire. Its “use it or lose it” rules means anything left in your FSA goes away when you walk out the door for the last time.

 

Everyone’s retirement is unique. There are all kinds of little details that need attention. Inventory everything you have on autopilot and how much cash you have available to use while things work through their processes. Figure out how to cover any financial gaps because there will always be lag time between your last day in the rat race and when your big picture retirement plan can start doing its thing.

In the weeks before retiring, concentrate on and manage the little picture details to get you through the retirement twilight zone, that in-between place retirees experience until everything catches up and recognizes us as retired.

My Retirement Spending Problem, How I Beat It

Early Retirement Lifestyle, Funding Retirement, Non-financial Aspects of retirement, Retirement Shock, , ,

Simply put, I had a retirement spending problem. I planned and saved for years so I could retire to the life I fantasized about. There were years of researching everything I could find about early retirement and personal finance, yet I still fought a retirement spending demon. It didn’t happen on day-one of retirement. Everything went exactly as planned. I ditched the rat race and celebrated sensibly for a few weeks while I settled in. But then my retirement spending troubles began. I had a big problem all right, I was psychologically attached to my retirement funds and it messed with my head.

We spend a huge chunk of our life saving for retirement and then, BAMO! We get hit with the reality that we have no idea how to mentally handle spending our hard-earned savings. I believe it was the hardest part of my retirement transition.

Retirement Spending Problem

Coming to Grips With Retirement Spending

The numbers were all there. I knew exactly what my lifestyle budget was and how much I would need to fund it. The portfolio was set up to make those funds available and yet I was miserable with concern, anxiety, and a lot of other emotions. All of which wasn’t in my very detailed early retirement plans.

What was in my retirement plan was using what was considered an acceptable safe withdrawal rate. That is always part of our retirement funding calculations. The fear of overspending in retirement and exhausting the portfolio before you leave the planet is well deserved. That’s why we de-risk our portfolios with diversified investments and make contingency plans for rotten economic scenarios.

As for my planned early retirement lifestyle, I had tossed aside any desires for extravagant spending decades earlier and embraced frugal living to get me to where I was. I had already created the perfect lifestyle. But even with everything planned for, I couldn’t shake the retirement spending nag. Going from retirement saver to retired spender was a mind warp!

I Reacted and Succumbed to the Spending Nag

I started to restrict everything I had planned on doing in my retirement that had a cost to it. My mind rationalized it as financially necessary and I didn’t think much more about it except for one problem, I still had memory of what I wanted in my retirement. It didn’t take long before I started to hate how this spending nag turned my retirement into a cheapskate lifestyle. I was always smart frugal, not cheap like this. What I was doing wasn’t anywhere close to the early retirement dream I worked so hard for.

I started to think about elderly relatives who lived through the great depression and how decades later they lived a miserly life even though they had a good amount of money stashed away. All of a sudden it all made sense to me. What I was experiencing was a different flavor of the same psychology. Only then was I able to self-assess my irrational retirement spending problem and turn it around.

Shifting The Way I Visualized My Retirement Spending

Let Go

Letting go of our title and work identity is a common subject talked about for retirement preparation. When I retired in late 2009 I don’t recall ever seeing anything about letting go of being a money saver. If I did I must have ignored it as a non-issue. Believe me, we do have to let go of being a saver. Even in months when my gains, dividends, and interest outpaced my withdrawals, I still could feel the spending nag of knowing those gains didn’t get reinvested like in the past.

Instead of letting this nag continue to rule me I decided to treat it the same way I did shedding my work identity. I recognized it as normal and part of my transition from worker bee to retired freedom seeker. I made a goal to stop letting this mental attachment to saving and growing my portfolio dictate my actions. Instead of letting it control me I now would control it. I made the mental decision to turn my unholy attachment to my saver mentality into something I needed to work through and let go of it.

Retirement Money’s Purpose

One of the things I had to remind myself about is that my portfolio was specifically created for one single purpose. It’s only purpose was to fund my retirement so let it. It wasn’t created to sit locked up and unused or worshipped like I was Gollum and his precious ring.   

Drop Emotion, Stick-To And Believe The Facts  

The numbers were sound and there was no logical need to restrict my planned retirement. They were double and triple checked using all kinds of scenarios to leave no logical doubt. There was no reason to have the retirement spending problem that I had. I simply recognized I needed to control my emotions and stick to the plan. Do that and everything would be fine.

Giving Time To Adjust

It took many years of smart frugal living and saving a big chunk of my income to get to where I was. It stands to reason that it would take time to adjust my mindset. I had years of conditioning my brain to successfully create a lifestyle I loved and pull off early retirement. No matter how much I planned what I wanted to do in my retirement and how I would fund it, it will take time to adjust my brain to this new way of living.

It Worked!!

It took a few months to fully relax into my retirement spending plan and I was cognizant of the nag for over a year as it occasionally surfaced. I look back now and I’m grateful that I took positive steps to recognize and counter the saver mentality that was over-controlling me. I know people who never escape it and live an unnecessarily restricted retirement.

Breaking free starts with having a smart budget that includes what we want to do in our retirement. A budget that then matches up to a sound withdrawal strategy. Then believing in the numbers, letting go of our saver’s mentality, and letting our retirement portfolio serve its purpose. Most of all, give ourselves time to settle into the new way of living and allow the numbers and planning to prove once and for all to our brain that everything is working exactly as it should.

Our spending discipline that gets us to early retirement won’t just disappear. If the worst should happen then we will logically do what’s financially necessary. In the meantime, purposely spend on the things that matter in retirement just as planned for.

How Much Cash Is In Your Portfolio? Why I Increased Retirement Cash Holdings

Bucket Strategy, Funding Retirement, Investment Strategy, Protect Assets, Risk Tolerance, Saving Money,

I decided I wanted to cash in a few chips and take some of my profits off of the table. I sold off investments and increased retirement cash holdings in my portfolio. Not just a little bit either. I’m on my way to 20% of my portfolio being cash. My decision had nothing to do with in-depth analysis of the yield curve or stock price to earnings (PE) ratios. Nor inflation threats or claims a lack of available workers may drag down this country’s latest economic growth predictions. Not to mention the possible negative economical impact of trade wars. Nope, it’s simply because of the convergence of my age, life expectancy, and the numbers to cover my nut with less on the table. It’s personal.

Increased Retirement Cash Holdings

Increasing Retirement Cash Holdings – What’s the Right Portfolio Percentage?

We all know we have to accept investment risk if we want decent returns. You have to play to win. Nobody can exactly predict or time the market. Major drops happen when they happen. That means we have to stay in through thick and thin.

Investment history suggests that over the long-term the balance of risk vs returns is generally favorable to the investor. Especially when we are practicing dollar cost average investing through both good and bad markets. But that all turns more into a gamble as the investor’s age vs longevity ratio tightens and we are no longer feeding the portfolio with earned income but instead depending on the portfolio to fund our retirement lifestyle. Market recovery time becomes more critical. A 5 year recovery period is a bigger percentage of your remaining life when you’re 60 than when you’re 45.

Portfolio Rebalance and Re-Running the Numbers

When I retired at the age of 51 I kept a small amount of my net worth in cash. I have different expectations now that I will hit the age of 60 later this year and can almost see my Social Security full retirement age ahead of me. I know how fast my years in early retirement have flown by thus far and will soon no longer be considered an early retiree.

For the most part I use the 110 minus age declining equity glidepath approach to rebalancing my portfolio. Subtract your age from 110 and that is the equity portfolio percentage to consider having. Logically that leaves the rest to bonds and cash. I use 110 instead of 100 for my declining equity glidepath rebalance calculation because Social Security will eventually play a role in the non-equity side of retirement funding. The calculation doesn’t explain how much cash is appropriate in the non equity side of the portfolio. Opinions seem to always be critical of holding too much cash. As far as I am concerned, when you have experienced a good run and have enough, it’s time to set aside some of your winnings.

I settled on 4 years retirement funding in cash plus a $25K emergency fund. My retirement withdrawal strategy uses a bucket approach and the cash is in my IRA’s bucket #1 and a savings account. My portfolio allocation looks like this:

  • 18.5% Cash/Cash Investments
  • 29.5% Bonds Fixed Income
  • 48% Equities
  • 4% Alternatives

To determine how much cash I wanted I simply understood my overall goals.

  1. Not have to worry or sell equities during a rotten market.
  2. Have my portfolio last as long as I do.

Increased Retirement Cash Holdings looks good

I then ran the numbers through the retirement calculator-FireCalc. I used 35 years of funding, 45% equity investment position, social security provided estimate amount, bumped up my yearly spending amount by $10K to counter higher cash holdings with its lower returns, and let her rip. The results looked great!

Full Proof? Hardly

Cash doesn’t offer anything in earning interest today and I have no idea how hard inflation will hit. Will interest earnings climb enough to offset inflation? Who knows. I also don’t know what will happen with social security, the markets, or the price of tweets in the White House. However, I am comfortable with this level of cash holdings even going to 20%. This is a decent time to take profits and I will continue rebalancing as long as the market continues to climb. I feel that the FireCalc calculation padding I used in my income numbers and longevity (I seriously doubt I will live to 95) that my odds look really good. Aside from all the financial considerations there is also the mental benefits to my increased cash move.  

High Retirement Cash Holdings – Cowardly or Courageous?

I do have a healthy fear of another market crash and multi-year recovery. There have been enough of them in my years of investing to know there will be more. I am making some optimistic assumptions when there are plenty of unknowns going forward. But what’s new there, there’s always unknowns when it comes to investing and retirement. I do count on adjusting things as needed.

I don’t see pulling a higher amount of cash to the side as either cowardly or courageous. This is simply wanting to hedge my bets and have options. I can cease selling any assets or taking IRA withdrawals in a down market and take advantage of opportunities to buy investments when they arise.

 

As far as I can see, taking profits after a historically long running Bull Market to have higher retirement cash holdings provides both downside protection and upside opportunity. At least in my personal situation. What is the perfect percentage of cash holdings to have in one’s retirement portfolio? How much cash is in your portfolio?

Money Worries When It Comes To Retirement? Essential Steps To Ease The Stress

Frugal Living, Funding Retirement, Retire Early, Retirement Plan, , ,

For many, the dream of an early retirement is what keeps us getting through the daily grind and the routine of work. When an end is in sight, it can make things seem much easier to deal with while still enduring the rat race. But when on the long road toward retirement for an unknown amount of time, it can be a long process and each day can drag on. If you are reaching a certain age then you’re likely to be checking out your pension and/or retirement savings pot to see when you might be able to retire. This can cause money worries when it comes to retirement.

If your dream is retiring and enjoying plenty of vacations on cruise ships and other travels, then you’ll want to retire with a good amount of money in the pot. But if that all seems a little far off because you haven’t seriously started to prepare financially and you won’t be able to retire for a while, let alone on any cruise ships, then don’t stress and despair. With some good planning, it can still happen. Making your personal finances and eventual retirement a priority in your life will help make a big difference in your retirement stress level.

Money Worries When It Comes To Retirement

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Easing Stress About Money Worries When It Comes To Retirement – What To Do

Use Your Employer To Save

It isn’t surprising to hear that those that enjoy their retirement and have less money worries, are those that have earned a good pension and/or contributed to retirement accounts with their employers. So if you are already contributing to your employer’s pension scheme, then that is a really good way to go. When they match what you are paying in, then it can make a big difference, much like the fed retirement scheme that government employees pay into.

Participating in your employer’s retirement scheme is the easiest way to save a large amount of money for your retirement. I can speak from experience because that is exactly the way I was able to retire early. If you are yet to pay into an employer’s pension, 401K, or other retirement scheme, then it is certainly something that is worth looking into and the sooner you do the better. It is never too late to start. That’s because doing it is always going to be better than doing nothing no matter how late you start. If you are already participating in your employer’s retirement scheme, then try to do whatever you can to increase the amount you contribute. Utilizing your employer’s retirement scheme is a great way to save and plan for YOUR future.

Non-Employer Associated Retirement Savings

Not every employer offers a retirement scheme for their employees. Seeking other ways to save for retirement is very important. Even if your employer does offer a retirement scheme, it is still a good idea to also save money for your retirement in non-employer based retirement accounts. It can start by setting money aside in an interest paying savings account. Then strategically use your savings to invest in low-cost funds. Consider using any of the low fee brokerages like Ally, Ameritrade, Vanguard and Fidelity. Use tax-preferential retirement accounts like IRA and Roth IRAs. Once again, saving anything is better than saving nothing for YOUR retirement.

Budget Well

Setting and living on a smart budget packs a one-two punch. The less you spend in your lifestyle will free up more income to put away for retirement. But budgeting doesn’t end once reaching retirement. It also must be part of your retirement planning. The lower your smart budget lifestyle is, the less you will need saved to pay for your retirement. Budgeting-well makes your target retirement savings amount easier to hit.

If you’re nearing retirement, it can be a good idea to look at what income you will have coming in. Think about how it is going to be spread out over your years in retirement. To start with, you are likely to have higher spending needs earlier on. Things like trips, vacations, and family gatherings will likely feature quite high. But as you get older in your retirement, you’re less likely to be spending as much doing those kinds of things. You’ll still be fairly active, but most likely living differently. As you age, money spending activities will most likely decrease. Other areas may remain flat or increase as in the case of health care. So look at what you’ll have and plan accordingly in your long-view retirement budget.

Ease into Retirement

From being someone who has worked for almost all of your life, going from being busy to suddenly not working can be a big step financially, socially, and emotionally. So for many people, it can be a good idea to ease into retirement. Working part-time with your current employer, or even looking for a more relaxed part-time role can be a good way to still be getting paid, staying socially connected, and getting you used to a little more enjoyable leisure time in your life. This kind of phased retirement approach will reduce pressure on your retirement savings and help lessen financial stress.  

Downsize Your Home

If worries about mortgage or renting are going to be bothering you, then why not consider moving to a cheaper property or even to a cheaper part of the country or world? When you don’t have to be stressing about paying a mortgage or high rent, then it can both ease your retirement financial stress and make your money go much further through your retirement.

Tap Your Home Equity

There’s another way to relieve retirement financial stress if you’re at least age 62, have built equity in your home, and are really happy with and to want to stay in your home. That is by putting your equity to work for you by taking out a reverse mortgage on your home. A reverse loan works differently from a traditional mortgage. With a reverse mortgage you will receive money regularly, rather than receiving regular mortgage bills. With no monthly repayment requirements, you also do not have to worry about being evicted for missing payments when the unexpected occurs. However, you cannot borrow the full value of your home. A reverse loan application calculator will use a special formula to determine the percentage to which you are entitled.

The borrowed amount will accrue interest until you leave the home, at which point you must pay the loan balance. Otherwise, the lender will recover some or all the money by having the home sold. Be sure to carefully review and understand the reverse mortgage terms. If married, make certain that terms allow for a spouse to stay in the home and your retirement payments continue if something should happen to one of you.

 

Everyone eventually retires, on their terms or not. A little retirement planning ahead of that time and taking positive action will help reduce retirement worries and stress. Anything you do to improve your retirement finances is a win!

The Fixes You Need When Retirement Goes Wrong

Funding Retirement

So, you’ve got your retirement plan all done and dusted and you’ve managed to save up a nice sum of savings that should help you get by once you do retire. And all of those preparations means that your upcoming retirement will be plain sailing, right? Well, unfortunately, that isn’t always the case. When retirement goes wrong you need to take action. There are a few issues that some people face once they retire, some of which they might not have entirely bargained for. For instance, their savings might not last quite as long as they had hoped or they might end up getting in some medical complications which could dramatically increase their monthly outgoings. 

To ensure that you can continue to enjoy financial security well into your retirement, it’s a good idea to have some fixes up your sleeve that you can use to solve any problems that look set to ruin things.

The Fixes You Need When Retirement Goes Wrong

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Maximize Savings Now

There is no better fix than prevention to make sure that your retirement isn’t turned upside down by any problems that might raise their head well into your retirement. But maximizing your savings doesn’t just mean that you need to start saving more – there are ways that you can help your current pot of savings to continue growing, even once you are retired. For instance, you should consider putting your retirement cash bucket in a high-interest savings account as they will accumulate a lot of extra interest over the years. Be sure to diversify your non-cash investments with allocation ratios aligned with your risk tolerance and long-term retirement funding plans.

Know How To Fix Your Credit

Just because you are retired doesn’t mean that your credit rating is safe. In fact, it could be a lot more at risk as you will no longer have a regular income from a full-time job. In the event that you do need to take out any extra financing or loans during retirement, you might find that it is a lot harder to secure some cash. But there are ways to ease the process, such as going through a credit repair company or financial advisor. These experts will be able to give you plenty of tips to ensure that your loan or finance application looks attractive to potential lenders.

The Fixes You Need When Retirement Goes Wrong 2

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Be Prepared To Return To Work

If your retirement finances really do start to look bad, you might need to return to work. Unfortunately, for those who never before considered a retirement job, this is something that cannot be sidestepped. When retirement finances go south, going back to work and earning again is the only real way to secure a regular income. So, as long as you are fit and healthy in retirement, you can have peace of mind that returning to work is always an option if you ever struggle to get by. Just stay curious in retirement learning new things to stay relevant. Aside to doing all you can to be healthy, you should also keep up the skills you already have to keep working in retirement as a valuable option.

Consider Releasing Your Equity

If you own your house outright then you will have a large sum of money tied up in it. This is known as equity. You can release some or all of the equity and get a sum of money by remortgaging your home. This is something that a few retired couples do if they ever need any extra cash. Just be strategic about it as this may also increase your monthly outgoings. You can always reap the equity in other things you own by selling non-essential items like second cars and any other property of value.

 

Hopefully, these fixes will help you think about ways out of any tricky financial situation that may come up during your retirement.

My Early Retirement SEPP 72t IRA Ends: How It Worked Out

Funding Retirement, Investment Strategy, Retire Early

My last SEPP 72t IRA payment was just delivered. I now close the door on government control over my early retirement funding. For the last 7.75 years I had IRA penalty free withdrawals using what the IRS calls substantially equal periodic payments (SEPP). I thought I would share how the IRA did from its original funding to its last payment to me.

I think this could be of interest whether anyone is considering a SEPP 72t approach to early retirement funding or not. It gives a glimpse into the impacts of investment allocation, a bad investment, and what a rigid withdrawal rate has on an IRA over several years of retirement funding.

SEPP 72t IRA Basics

The SEPP 72t is an IRS rule that allows someone to make pre-age 59 ½ withdrawals from an IRA without having to pay the early withdrawal 10% penalty. Only your normal income taxes would apply.

The IRS 72t rule dictates the withdrawal amount. It is based on current bond interests rates, your age and your life expectancy at the time of beginning the 72t. The idea is that your IRA would survive long enough to fund your retirement for your lifetime.

There are 3 IRS approved withdrawal methods and you can make one withdrawal method change during the life of the SEPP 72t.

The 72t payments must run its course once it begins for the longer of 5 years or you reach age 59 ½. In my case the run-time was to age 59 ½, making my 72t in play for 7 years and 9 months to complete my 72t run-time rule obligation.

Run afoul of their rules and the IRS will assess the 10% IRA early withdrawal penalty back to the very first SEPP 72t payment you received plus applicable interest. That applies even if the IRA fails before meeting the obligated run-time length rules. Careful investment allocation is advised so that a market crash doesn’t send the 72t IRA into funding default.

(Update 1/13/19: I made a mistake regarding an account being depleted as the IRS States: What is the effect of an account being completely depleted? If you have no assets remaining in your individual account plan or IRA, you will not be subject to the Code §72(t) tax as a result of not receiving substantially equal periodic payments. In addition, the recapture tax will not apply. I mistook explanations and missed this. Thanks Brian for pointing this out)

It is for these reasons I used a CFP to set up and manage my 72t IRA. It is advisable to not lockup all of your retirement IRA funds in a SEPP 72t. Always hold some of your retirement portfolio separate from the 72t.

 

My SEPP 72t IRA Details

My SEPP 72t began February 2010. At that time the IRS allowed 72t interest rate was around 3.5% to use in the SEPP calculation.

Looking today online at the SEPP 72t allowable set interest rate to use, it seems the allowable interest rate to use is 2.4% for December 2017 and estimated to be 2.54% for January 2018. The approved interest rate changes as bond rates reset.

72t IRA Balance Details

My SEPP 72t began Feb 2010 and ran until Nov 2017 = Obligated run-time 7 years, 9 Months.

72t IRA Beginning balance – $665,000

72t IRA Ending balance – $586,528

The 72t IRA Amounts Paid Out During IRS Obligated SEPP Timeline

72t IRA Early Retirement Income Paid – $260K

72t IRA CFP Fees (estimated) – $39K

Total Amount 72t paid out = $299K

Figuring Out The 72t IRA Results

The first observation is that the 72t IRA is down $78,472  (11.8%) from my initial investment. That may seem odd given the run-up in the stock market since February 2010 to now. There are a couple of issues that I believe addresses this result.

One of my investments (highlighted below) took a 40% dump. This represented a large part of the SEPP 72t IRA $78,472 deficiency when only looking at the beginning and ending totals.

The SEPP 72t withdrawal calculation used a bond interest rate of 3.5% within its algorithm. Bond rates were higher at that time than they are now. This resulted with what was a 5% withdrawal rate of the total funding SEPP IRA. There were no yearly inflation adjustments but this is still far higher than the well discussed 4% safe retirement withdrawal rate. That 4% rate is now challenged as being too aggressive as a safe withdrawal rate. A 5% withdrawal rate clearly has an impact on the portfolio.

The SEPP IRA was conservatively invested and designed to chase yield. It did not benefit as much as it could have had there been more stock exposure. This was done purposely. The rest of my portfolio outside of the SEPP 72t IRA was invested heavier in stocks. The overall portfolio was considered for an appropriate investment allocation when looking at stock to bond and international to US investment ratios. This was also done to avoid 72t default in the event of a stock market downturn.

Even after the above considerations, the SEPP 72t IRA produced enough income and growth to pay out $220.5K overall ($299K paid out minus the $78.5K beginning to ending IRA balance deficiency).

How My SEPP 72t Was Invested

Please note that the 72t IRA had investment changes over it’s 7.75 year run and this is the current (11/24/17)snapshot/reported yield.

Cash = $34,066

Investment Mutual/UIT Funds = $552,462

Total SEPP IRA Value = $586,528

Invested Mutual/UIT Funds

ACETX – INVESCO EQUITY & INCOME $40,509.06 (7.33% of 72t)  Yield 1.76%

BIICX – BLACKROCK MULTI ASSET INCOME INSTL $29,362.14 (5.31% of 72t) Yield 4.5%

DIFIX – MFS DIVERSIFIED INCOME $29,881.61 (5.41% of 72t) Yield 3.2%

FGIYX – NUVEEN GLOBAL INFRA $35,119.09 (6.36% of 72t) Yield 2.76%

FRIRX – FIDELITY ADVISOR REAL ESTATE INCOME $37,563.30 (6.8% of 72t) Yield 4.08%

FSRIX – FIDELITY ADVISOR STRATEGIC INCOME $94,852.42 (17.17% of 72t) Yield 3.18%

MBDIX – MFS CORPORATE BOND $67,315.98 (12.18% of 72t) Yield 3.38%

MLPOX – OPPENHEIMER STEELPATH MLP ALPHA $19,307.78 (3.49% of 72t) Yield 8.1%

OIBYX – OPPENHEIMER INTL BOND $59,600.10 (10.79% of 72t) Yield 4.18%

OOSYX – OPPENHEIMER SENIOR FLOATING RATE $57,604.36 (10.42% of 72t) Yield 4.44%

PXHIX – PAX WORLD HIGH YIELD BOND INSTL $81,346.39 (14.72% of 72t) Yield 5.46%

 

In Closing

It’s easy to see that a higher IRA withdrawal rate, an investment loss, and a yield focused conservative investment allocation can result in a lower portfolio balance regardless of any prolonged market recovery.

As I move into Phase 2 of my early retirement funding plans I will be using what was learned from the first 7.75 years of my SEPP 72t. I happily look forward to being able to have more control over my retirement account withdrawals going forward.

After considering everything, I do believe this was an early retirement funding success. I have enjoyed this adventure called early retirement much more than I could have imagined.

Using the SEPP 72t IRA rules to allow early access to my retirement accounts without penalty was definitely a successful strategy for my situation.

KNOW Your Retirement Budget Before Retiring By Living It First

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How accurate do you want your perceived retirement budget to be? Nobody wants to mess this up because it can result in blowing through the nest egg quicker than planned and your retirement ending badly. That’s why it’s a good idea to actually KNOW your retirement budget before retiring. At least knowing as close as possible. That is best done by living your retirement lifestyle before retiring. The best way of doing that is by living as much of it as you can.  

We all run our numbers through a trusted retirement calculator based on our perception of what we will reduce our spending on in retirement. We may also add a bit to the budget to support our retirement travel desires. But there can be a big difference between perception and reality once living it. Here are a few pointers to help you KNOW your retirement budget is reality based.

Proving Conventional Retirement Spending Wisdom Right or Wrong

Everyone believes they will spend much less in retirement. We tell ourselves that because the notion that we all need 80% of our working income in retirement is a tall order to fill. That and it is far from being true for a lot of people. But the only way to KNOW is by living it first while you are still collecting that paycheck. Chances are if you can’t do it when still in the grind then you probably won’t be able to live with that budget in retirement either.

People do a lot of things because they either really enjoy it or they can’t live without the convenience it provides. Living your retirement lifestyle and budget before retiring is as much a personal mentality check as it is a retirement budget reality check. Some habits are harder to give up than others. That being said, this all should happen long before ditching the rat race. Getting this right is about the rest of your life in retirement. One should give themselves years of practice to work through this as it may take a gradual approach by incremental spending reduction and lifestyle changes instead of going abruptly cold turkey on the day you happily skip away from the job.

 

KNOW Your Retirement Budget Before Retiring

Giving Frugal Living A Shot

Frugality may be the last thing on your mind, but like it or not, most retirees do embrace an element of frugal living to stretch their fixed income and savings. Retirement budgets usually assume cuts in all kinds of spending. Adopting your more frugal retirement lifestyle in advance will not only allow you to understand how you will live but get you closer to knowing your retirement budget and whether you can live with it. Doing so in pre-retirement will also free up more money for debt elimination and retirement savings.

Nobody wants to live a life feeling deprived. Finding your frugal thresholds helps set a sustainable retirement budget and lifestyle to base your plan on. The first step is tracking where your spending goes. Then trimming back things you won’t include in your retirement lifestyle. Why wait until retirement? If it isn’t going to be important to your happiness in retirement then shed that crap now. Otherwise you may make a bad retirement budget assumption that will end up straining your plan.

Obviously there is employment related costs that can’t be cut in pre-retirement. Commuting, work clothes, occasional lunches out, etc. But tracking what you are spending allows you to accurately subtract that out of your retirement budget projections. It also lets you see how much you could save by trimming workday lunches eating out or other little things. Like parking your car and instead going for mass transit or carpooling and maybe saving even more money now.

Keeping it real

Living more modestly before retiring will get you closer to understanding what is realistic in your retirement budget. Thinking you will have time in retirement to clean your own house or mow your lawn to save money in retirement after firing the maid or landscape contractor will only happen if you can be happy doing that stuff yourself. If your perceived retirement budget isn’t including luxuries you pay for now, then live like you can’t afford what you freely spend on while working. Trim it away before retiring.

Sometimes we use the excuse of having little time to justify our convenient luxury spending choices when it might actually be we hate doing that stuff ourselves. Find out before you retire so your retirement budget reflects the truth.

Give Your Non-Essential Living Expenses Careful Review

Unfortunately retirement can and will mess with your mind. We just don’t go from career to retired without some mental transition effort and time to happily get there. Besides unintentionally connecting our self-worth to what we did for money, we also attach it to other things that may have a high cost. Like the county club, sports, hobbies, fitness club, over-spoiling the grand-kids, etc. Saying you are going to cut back spending once retired in areas you have connected with in this manner may be far harder than you can imagine.   

Instead of just assuming you can cut things in retirement, trim it back now and find out for sure. This will allow you to try out your assumptions.

 

Give up the gym and try working-out at home or other forms of exercise. Use public golf courses, scale back expensive hobbies or sports. Match your lifestyle now to try out your perceived retirement levels.

So much of what we enjoy gets attached to our self-worth. It can also be a big part of our social life and what we are retiring to. Both of which will also need to be shifted and worked on. There is no better time than pre-retirement to test your assumptions.

Some Retirement Costs Require Having a Plan B

Some costs can increase far above the inflation rate we use in our budget planning. You can’t always just raise your retirement budget when something you planned for or you really need ends up escalating in costs beyond projections. It will require making some big adjustments in retirement spending and lifestyle. It is a good idea to establish a Plan B and when possible practicing it before retiring. Some areas that have risen far above the inflation rate in recent years and have a huge impact on a retirement budget are:

Health Care –

If you retire before being Medicare eligible and things continue like recent history then expect double-digit increases year after year.

Property Taxes –

As home values recovered since the real estate bubble caused recession, property taxes have drastically increased.

Home and Auto Insurance –

Insurance companies pass their losses due to natural disaster to the customers whether you have had a claim or not. Tornadoes, hail, biblical rainfall, wildfires, and hurricanes across parts of the country are happening more often.

What you can do

When living your retirement budget, pay attention to these increases and identify where you can cut back in other areas if they bust your retirement budget once retired. For example, find out if you really can handle skipping or trimming vacations. If traveling is a huge part of your pre-retirement life and will also be in retirement then cut way back or suspend travel for one season. Then bank the savings.

Park the car and use mass transit or bicycle every weekend or when off work for a while. Understand that you may not be physically able to that in older age. Could you live without a car? Would you consider moving to a more mass transit friendly location to save your retirement budget?

Are you assuming that you’ll keep your huge entertainment cable or satellite TV package in retirement? Cut the cord for a while and see if you can live without that if you had to.

Can you consider reentering the workforce? If so, do have a plan to stay employable by keeping and/or gaining skills? How about staying physically and mentally fit?

These kinds of things should be part of your Plan B if things go awry.

If you find that unappealing then you must ramp up your needed portfolio savings target to accommodate the possibility of having to raise your retirement budget for these kinds of uncontrollable cost increases. That may be a turnoff if you’re already struggling to save enough as it is. But it’s always a great idea to over save than under save for retirement to handle all kinds of budgetary surprises.

Last Words

Living your retirement lifestyle and  budget before retiring is about getting it as close to reality as possible. In both your financial numbers and the assumed retirement lifestyle you are planning for.

Want to Retire Confidently? Set A Retirement Savings Target

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It’s no wonder that many people fall short with retirement savings. They have no idea what they need. It would be impossible to know if you are on track without having a retirement savings target to shoot for. People tend to fall into three categories when it comes to retirement savings. The confident, the worried, and the clueless. One way or another, retirement will eventually happen to everyone alive. Wouldn’t you prefer to know you’re doing everything you can for a better retirement?

Cluelessly entering into retirement should be the last thing anyone wants. Moving from the clueless to the worried class of retirement preparedness is a necessary step in the right direction. A little fear can go a long way in lighting a fire under one’s keister to take positive action. For retirement confidence, the sooner you set your retirement savings target the better.

Sadly, Too Many Are Clueless About Their Retirement Savings Needs

Want to Retire Confidently? Set A Retirement Savings Target

The recent Merrill Lynch/Age Wave study results clearly shows that people don’t know how much money they need to save for their retirement. For people age 50 and older, only 27% felt prepared financially for funding their retirement for 10 years. Worst than that, 81% didn’t know how much they needed saved to fund their retirement.  

This isn’t just an American phenomenon. In Great Britain the Pensions and Lifetime Savings Association found similar findings in their studies. They found that 78% didn’t know whether their retirement savings were on track to meeting their retirement funding needs.

Setting A Retirement Savings Target

There are a lot of calculations and unknowns that come with retirement planning. Certainly seeking help from a trusted Certified Financial Planner should be considered. Below is a basic and simple approach to finding a base. This base should be considered only the lowest retirement savings target to shoot for.

Step 1- How Much You Will Need

The first order of business in setting your retirement savings target is knowing how much income you need to pay for your essential living costs. Think housing, utilities, grocery, transportation, and insurance. Get intimate with your budget. Figure out your minimum lifestyle needs. Based on that amount also add to it a proper percentage for taxes.

Step 2- Inventory Your Guaranteed Retirement Income

Next is listing all anticipated guaranteed retirement income like Social Security or other government pension scheme. That also includes any work related pensions you have or will earn. This will require requesting a current estimate of your future benefits and at what age you will be eligible for the benefit.

Step 3- Determine The Amount Your Retirement Savings Must Cover

Now subtract from your essential living costs the guaranteed retirement income amount you will receive. This result is what will be used to set your base retirement savings target. The target is the estimated amount you need your retirement savings to fund your lifestyle essentials.

Step 4- Calculating Your Base Retirement Savings Target

The final calculation is using the much discussed safe 4% retirement withdrawal rate. It isn’t as favored as once was. But it allows a simple equation for setting our minimum retirement savings target. Simply multiply your funding figure by 25. This result is the amount you should set as your minimum retirement savings target.

Example: Monthly base essential living cost $2500 – Social Security $1200 = $1300 X 12 months = $15,600 a year X 25 = Base Retirement Savings Target $390,000.

If you plan on retiring before you begin receiving any guaranteed retirement income then make sure the amount needed during your early retirement years is added in to your target amount.

This is an Estimated Base Retirement Savings Target and Not Gospel

Congratulations, you have just figured out your scrape-by retirement savings target. Understand that whatever you come up with in this calculation that you should save much more. It only used essential living costs. There are many unknowns that we will face in retirement. One-time large financial hits occur throughout our lives and will do so in retirement. Healthcare, inflation, and even our longevity are unknowns that must also be accounted for.

We should also include wanting to save for more than just living essentials and add some fun in our retirement. The above approach is only the closest savings target to hit. Other savings targets should be set beyond it to aim for. Get into the practice of running your numbers through a good retirement calculator as you go. It will help you to fine-tune your retirement savings target. Then it’s all about saving and investing as much as you can to meet it and beat it.

What To Do If Your Base Target Amount Will Be Missed

When your best savings efforts isn’t going to be enough then hard choices must be made, and the sooner the better. If savings targets will be missed under your current situation and future projection then consider doing anything you can to cut your essential living costs.

There’s frugal living, downsizing your home and lifestyle, debt elimination by any means, planning on relocating to a less expensive place in retirement, etc.

Anything that can be done long before retirement will mean freeing up more money to allocate toward retirement savings. It also reduces your target savings amount needed. Last but not least is delaying your retirement for as long as you can. IF YOU CAN.

Missing the target means figuring out how to live on only your Social Security and/or other pension scheme for what could be a 30 year or longer retirement..

It is Always Better To Be Informed

When it comes to retirement, keeping one’s head in the sand thinking ignorance is bliss is a huge mistake. So is the often “I plan to work until I die” retirement plan. Many people end up retiring earlier than they planned due to job loss, health reasons, or having to care for a family member.

The simple scrape-by retirement savings target calculation moves us from clueless to worried status. But taking positive steps forward based on knowledge, preparation, and action reduces fear. It gives us a chance to correctly save and track progress for our inevitable future. Once we can see that we are on our way to meeting even our base retirement savings target we can have the peace of mind that comes with any level of retirement confidence and hopefully long before we retire.

What are the Financial Concerns Preventing Retirement?

Funding Retirement

Even if you’ve actually managed to pay off your mortgage and all other non-mortgage debts, and you’re quite happy to embrace a more frugal lifestyle, it can still be a little daunting when the time comes to pull the early retirement trigger. In fact, due to the current financial environment we find ourselves in, it isn’t only a daunting prospect for those of us who want to take early retirement, but also for those of us who want to stop working once we reach the retirement age.

A recent article, published by CNBC reported that while the richest 1% of families living in the United States had managed to save $1.08 million for retirement by the end of 2013, the average American family had only managed to save $5.000. This means that for the majority, retirement is a financial burden and not the well-earned rest we’ve dreamed of. Furthermore, apart from the lack of retirement savings, other stressful financial concerns that plague pre-retirees include the following.

the Financial Concerns Preventing RetirementPhoto by Jeff Sheldon on Unsplash

Fear of the unexpected

When the car breaks down, the roof starts leaking, or a family member needs urgent medical care, our monthly paycheck keeps us above the water. However, the thought of having to deal with unforeseen expenses without the safety net of a regular monthly income is enough to keep most of us out of retirement forever.

The thing is that we can never be fully prepared for every eventuality in life, no matter how diligent we are with our savings and how carefully we’ve planned our retirement. Sometimes the thought of the unexpected is actually worse than the reality. One way of slipping gracefully into retirement without living in constant fear of what’s lurking around the corner, is to find ways of cutting back on daily expenses. If we can reduce our monthly payments by moving into a smaller living space, selling the car and spending less at the supermarket, we might actually reduce the pressure we feel as a result of our new financial reality.

Rising health care costs

Health insurance is expensive. There’s no getting around it. As we get older, premiums increase. What is more, proposals like the recent Republican health care bill would have raised premiums for older Americans by more than 750%. Our bodies also tend to be less reliable. Falls among the aging community are common, as too are chronic diseases like diabetes and osteoporosis.

All of this means more medical care, more bills and more financial stress. Of all the things you can choose to cutback on, health is not one of them. Buying a supermarket’s own brand of bread is one thing. Not having health insurance to cover you when needing hospital care is a whole other story.

The disappointing reality of Social Security

For the Baby Boomer generation, Social Security was dubbed an entitlement; an assured benefit that all retirees would simply be guaranteed when the time came to give up work. Today, we know all too well that Social Security is on the financial endangered species list. Most people approaching the end of their working years can’t depend on Social Security, and can instead only really rely on funds they’ve saved and assets they’ve accumulated to see them through the next 18 years or so. As we already know that our retirement funds aren’t going to give us the financial support we need, the absence of the promised Social Security makes it even more difficult to take the plunge and retire completely.

The pressures of inflation and rising living costs

Inflation isn’t helping the situation either. The Social Security’s annual cost-of-living adjustment (COLA) is an increased benefit which is offered to Americans on a monthly basis. There was no COLA for 2015 and only a 0.3 percent increase for 2016. The result? Anyone on Social Security over the past two years has been simply left to battle against the difficulties of inflation on their own. Inflation is making life particularly difficult for retired Americans, with as many as three out of five middle-class retirees outliving their funds when trying to maintain their pre-retirement lifestyles.

Essentially, having cold feet about retirement, early or otherwise, is normal right now, but we must try to avoid allowing our fears from holding us back. Being aware of the instability of our economic environment, our first port of call must be to make adjustments to our lifestyle choices.

 

This Article is a contribution to Leisure Freak from the talented freelance writer Jackie Edwards.

Now working as a full-time freelance writer, Jackie Edwards is also a busy mum of two small children. In any free time she has (which isn’t much) she likes to volunteer and do charity work and take the family greyhound Bertie for long walks.

Investment Options: The Best Plans for Your Retirement

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Unfortunately, there are many people who don’t plan for their retirement and find themselves having to survive on a much lower income than they’re used to. It’s important to plan financially for the future, no matter what stage of life you’re at. One of the best ways to ensure you’re provided for in your retirement is to invest money in plans that are likely to result in a substantial return. That way, the younger you start investing, the more money you’ll have in retirement. So, what are the best options for retirement investment?

 

Retirement Investment Options

Pension

Of course, the safest option for retirement is a pension. However, the state pension or Social Security you receive from the government may barely cover the essentials. If you can help it, you don’t want that to be the only pot you have to rely on. The money being put into pensions at the moment reflects the cost of living right now. By the time you’ve retired, the cost of living is expected to increase. Additionally, many corporate employers in the US are backing out of retirement schemes, leaving their employees to fend for themselves.

So, what do you do? Pay into your own pension. There are many ways you can set up your own pension pot and put a percentage of your monthly wage in. Once you’re used to that percentage being missing from your paycheck, you won’t notice it’s gone.

 

Defined Contribution Plans

You’ve probably already heard of a 401K, but are you making the most of it? The benefit of having a 401K is that you’re not responsible for putting money in. The amount you pay towards it is automatically deducted from your pay, so you never see it anyway. Your employer is likely to contribute too. Many employers match the amount you put in, so you’ve got a 100% increase with every contribution. It’s safe, and you’ll hardly think about it until the day you need it. The only downside is the tax fees whenever you make a withdrawal.

Retirement Investment Options

 

Property Investment

If you already have a full-time job, the thought of property investment may be something that puts you off. However, investing in property doesn’t mean you have to have a huge portfolio. In fact, investing in just one property per year could make you enough to have a decent nest egg by the time you retire. Purchasing fixer-uppers and using your spare time to upgrade the property could give you a great financial return. Similarly, investing in foreign real estate like resale HDB could mean you have access to cheap properties that you can rent for a profit, especially if they’re in the right location. Just make sure you understand the country’s property ownership rules and you qualify to purchase or invest there. You don’t have to take property investment on as a full-time job, but there is huge potential to make big money.

 

Stocks

Some stocks have the potential to earn you a significant amount. Whether you invest in a stock that stays steady and you make a small amount often, or you take a risk on a stock that could go either way and come out with a big payment, stocks have the potential to set you up for life. The problem is, you need to be willing to learn about the stock market, rather than just take a gamble. Investing in stocks through ETFs or other mutual funds may be the easier path into stocks. Just like any other kind of business, you need to do your research and continue to gather knowledge so the stock investment choices you make become more of a sure thing.

 

Business

If there’s a gap in the market, setting up your own business could be something that rewards you in retirement and continues to reward your family after you’re gone. Just one great idea is enough to get a business started. If you’re already working and want the business to be an extra income for you, consider investing in someone else’s business ideas. There are lots of small businesses looking for a cash injection to expand. You could buy shares in the business, be a silent partner or just agree to a percentage of the profits. Just make sure to get everything you agree on down in writing. You need to cover yourself if you’re going into business with someone else.

Retirement Investment Options

 

Savings Accounts

The majority of savings accounts aren’t worth looking at because the interest they gather is next to nothing. However, there are a few accounts that are worth opening if you’re planning your retirement early. For example, look for accounts that increase your interest level if you’re willing to keep your money in the same account for an extended period; usually more than five years. If you touch the money before the period ends, you’ll forfeit the interest, but if you keep the money in until retirement you can take it out in one large sum or have it in installments in addition to your pension. Obviously, the more you put in, the more you get out.

 

Cash Value Life Insurance

This is a great option for anyone who wants access to funds during retirement and a life insurance plan. You have to take out a policy, as you would with any other kind of insurance. But, as you pay towards the policy, you build up a cash value. Once the cash value is accumulated, you can use some of the cash during your retirement. For instance, if you were to accumulate $500,000 and use $250,000 during your retirement, your beneficiary would still receive the remaining $250,000 after your death. It’s ideal for stay at home parents or part-time workers with little cash flow per month.

 

Assets

If you’re not good at putting money away for your retirement, maybe you’ll be better at shopping for your retirement. There are many items you could buy that increase in value over the years. For example, antiques, classic cars, statement jewelry and more. If you’ve got a keen eye for valuable assets, it’s worth investing with a view to sell during your retirement. It’s a great way to get constant cash injections when you need them.

 

Retirement is a stage that should have a financial plan, no matter how far from it you are.