Category Archives: Retirement Plan

Milestone Reached: Entering New Early Retirement Phase

Retire Early, Retirement Doubt, Retirement Plan

When I decided to retire early I always considered my plan to be one of phases. Where milestones would be reached and planned financial strategies would become available to implement. Each early retirement phase brings decisions that would need to be made based on relevant current data and the realities of real time. We’ve never had a million dollar portfolio to draw from so planning is essential. In my wife’s and my early retirement we have just reached another early retirement plan milestone. We have now both enjoyed our 62nd birthday. Here’s a glimpse at our early retirement phase approach.

Milestone Reached: Entering New Early Retirement Phase

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Using An Early Retirement Phase Approach

Early Retirement Age to Age 59.5 Phase

Key to early retirement is how to fund your new lifestyle. Once the paychecks stop the money has to come from somewhere. In our case almost all of the money was in tax deferred retirement accounts. For our situation we rolled our 401ks into IRAs.

For my retirement at age 51, penalty free pre age 59.5 IRA withdrawals required my using the SEPP 72t loophole. I would use that until age 59.5 for monthly distributions to cover my part of our split budget. Because these distributions are meant to be uninterrupted for the longer of 5 years or age 59.5, when doing my “retire early and often” thing I would reinvest any retirement job earnings back into our net worth. I retired during the great recession and this went far better than anticipated. My earnings reinvestment included mortgage payoff, taking advantage of 401K opportunities, and adding to our Roth holdings. 

My wife retired on her 58th birthday after meeting her 20 year work anniversary. She received a couple of small perks for hitting that 20 year milestone from the local bank branch she worked for. Instead of using age 55+ 401k penalty free distributions she simply set aside enough cash in a savings account to cover her part of the budget until reaching age 59.5. This way she could avoid retirement account taxes/penalty issues for the first 1.5 years of her early retirement.

Age 59.5 to Age 62 Phase

In this early retirement phase my SEPP 72t would end and we both could then freely establish a monthly penalty free distribution rate from our IRAs based on budgetary and actual real time portfolio numbers. This phase still requires 100% reliance on our portfolio to continue funding our early retirement lifestyle and takes us to the age of Social Security availability when new decisions would be made. 

Age 62 to Age 65 Phase

This is the early retirement milestone we both have recently reached, my wife last December and myself this June. When to start Social Security benefits takes the consideration of financial, longevity, legacy, and emotional issues. We don’t know how long we will live, how solvent Social Security will be long-term, or whether financial markets will act historically. 

Based on what we know today and running our numbers through both a retirement calculator and Social Security calculator we decided to start my wife’s early age 62 reduced Social Security benefit. As the top wage earner between us and the way survivor benefits work, my plan has always been to wait until at least my full retirement age of 66.7. With my wife being the lower wage earner, starting her Social Security now allowed us to reduce her monthly IRA distribution by 66%. The smaller IRA distribution and her Social Security together covers all of her budget. I continue funding my part of the budget from my IRA distributions.

Age 65 to 70 Phase

With the age 65 milestone early retirement phase comes Medicare. For our entire retirement I’ve had to pay for retirement health insurance costing me in the 30% to 35% of my overall budget. Our Medicare should greatly reduce my budget and retirement funding needs. At this point I feel we will no longer be early retirees and just traditional well practiced and experienced retirees. 

This is also a phase where I will make my own Social Security decision. Either take it at full retirement age or delay until age 70. My FRA Social Security estimate would cover 75% of my budget as it is today and my budget should actually be lower after Medicare. Once beginning Social Security I will need much less dependence on my portfolio for lifestyle funding. 

Depending on portfolio performance we will also begin financial planning that looks at looming RMD–Required Minimum Distributions during this phase to have time to strategically prepare in advance. 

Age 70 and Beyond Phase

I can only hope to have RMD problems in our last early retirement phase. Meaning there is a good sized portfolio left after decades of retirement. When this time comes we will do as we have done. Evaluate the reality of the real time and deal with it strategically. If still in our current home we will also start to consider what’s next. Our 2 story home sitting on a quarter acre in Colorado at 6,200 feet in elevation might be more than we will want to stay into older age. This is a phase where the reality of our own aging will play a major role.

It All Seems So Simple Now

When we were still working and planning for early retirement it sometimes felt scary. We get conditioned after decades of employment and paychecks. There can be fear of walking away and giving it up, even for the freedom that early retirement offers. All of the unknowns and cautions thrown at us can be intimidating. Especially when looking at it financially covering 20, even 30 plus years of our lives. But by chunking our retirement plan into retirement phases it makes it easier to mentally visualize and financially plan for. At least it has for us. 

Echoes of 2008: Will COVID-19 Change Your Retirement Plans?

Early Retirement Lifestyle, Retirement Doubt, Retirement Plan,

I’m hearing echoes of 2008 when the great recession was being fully recognized. If you are feeling angry, concerned, depressed, or worried about your coming retirement or its lifestyle, then congratulations are in order. You’re ahead of the population who have no plan and no options. I retired early just over 10 years ago and remember clearly how this can feel. The 2008 recession happened just as I hit my early retirement target. This time around the question is, will COVID-19 change your retirement plans? 

Although the financial collapse of 2008 and this pandemic both come with the tag of “unprecedented”, this is different. There are just as many unknowns and it may take years for things to appear anywhere near normal. But this worldwide event isn’t just about financial and employment turmoil hitting people and the economy. It’s also our physical health, even life and death.

Echoes of 2008: Will COVID-19 Change Your Retirement Plans?

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Should COVID-19 Change Your Retirement Plans?

It was an agonizing decision in 2008 when I decided to delay my early retirement. A delay that lasted a year. Things were still uncertain when I finally announced my retirement at the age of 51. But I was confident it was the right time to walk away. Where some of what I faced then still applies today, there are also new COVID-19 challenges to one’s retirement plan to consider. 

Employment –

The 2008 recession brought many layoffs. I began vocally angling for layoff selection so that I could collect a severance package and spearhead my retirement. They would instead choose to financially devastate other employees who needed to work and then pass all their work to me. I should have kept my eagerness to leave to myself and just under-performed. But at that time I had a misguided notion of workplace legacy that prevented me from doing that. So I used my time to continue saving and investing. I also looked for signs that the market had bottomed. That bottom happened in March 2009, but it took another 6 months for me to feel comfortable with that assumption. 

Healthcare –

Timing retirement for healthcare was crucial to my plan. I earned a retirement healthcare benefit where I could buy into the employee plan after 30 years of service. Leaving at my planned date or delaying retirement had no impact on it. I do pay a hefty price for my retirement healthcare and could save money with the ACA. But I have stayed with my old employer plan since it’s a “use it or lose it” benefit and the ACA has been under constant political threat.

Portfolio –

In the 2008 recession my portfolio took a big hit just like everyone else. I was diversified with a mix of stock and bond funds. But there was no safe haven from the recession’s crippling grip. It was depressing to finally get to my target and then watch my portfolio damaged by the recession. I kept running my numbers through a retirement calculator to build retirement funding confidence. Almost all of my retirement portfolio was in 401K, IRA, and Roth accounts. 

I had always planned on rolling my 401K and IRA funds into a SEPP 72t IRA retirement funding account to receive pre age 59 ½ penalty free distributions. While I was still on the job I would monitor the SEPP 72t calculated formula interest rate to assure distributions would meet retirement funding needs. As interest rates drop it takes much more to be tied up in the SEPP 72t IRA to get the desired retirement funding. 

Debt –

I was debt free in 2008 other than my modest mortgage. As interest rates continually dropped I used the delayed retirement time to refinance at a lower mortgage rate. The bank only saw me as someone still working for a long time employer. Not someone who was just waiting for the right moment to ditch the rat race.

The refinance lowered my monthly payment and at that time they offered no fee refinancing. The reduced mortgage payment allowed me to set aside more each month in my retirement savings as I waited for signs to pull the retirement trigger. Having a lower mortgage payment  also lowered the amount I would need each month from my portfolio once retired. 

Retirement Lifestyle – 

My job was far from flexible, I was required to be on site as a lead engineer supporting a billion dollar revenue generating operation with 24X7X365 pager obligations. I understood what I wanted to retire to, looking forward to a more flexible retirement lifestyle. I was upset about how the recession impacted those plans as much as any financial concerns. 

My plans included what I call retiring early and often. There were a lot of opportunities I wanted to pursue aligned with my interests and passions. I see retirement’s definition as the absence of NEEDING to work, not the absence of working. The timing of the recession and job retraction added challenges to that portion of my retirement plan. 

Some of my plans regarding my local community were being changed on a monthly basis. There were numerous business closures, places that I frequented and had built relationships with. Some of my more idealistic pursuits or retirement dreams were shattered with their closures. It required me to constantly change my retirement lifestyle goals and accept it as part of the flexibility I wanted to embrace.

In an environment where jobs and money are tight there are other dynamics that came into play. For example, I planned on being more free to travel. Checking travel rates during the recession showed that everything was discounted, making our travel more affordable. I’m an automotive enthusiast and it’s a big part of what I retired to. People thought the world was coming to an end in March 2009. On a panic sale I was able to purchase a car at a huge discount that I had been researching and chasing after for over 3 years. Where recession challenges presented themselves in some parts of my retirement plan others opened up.

New Pandemic Issues That Should Be Considered Within Retirement Plans

I used my early retirement delay to better position myself financially. But also just as important, to better position myself mentally for the new landscape that I would be retiring in. There are parallels with what’s happening now. But answering the question today, should COVID-19 change your retirement plans, has different nuances worth considering.

Safety –

COVID-19 is highly infectious and dangerous. I didn’t have to worry during the 2008 recession that staying on the job could kill me. When looking at the public who are now out and about, there is a high percentage who don’t take COVID-19 seriously. I have to believe that will be likewise in the workplace once it opens up. If I felt my work environment wasn’t safe I would have done things differently than I did when it came to my retirement delay decision. 

This safety issue is also paramount to retirement lifestyle plans. Just going out to the grocery and recreation, let alone travel, carries health risks. Finances aside, if I was able to ride this out with a work from home position I certainly would again delay retirement. For the already retired like myself, this atmosphere today is nothing like my pre-COVID-19 retirement lifestyle. I was amused to read that some felt this has been a taste of early retirement. But I see little difference to what one’s restricted lifestyle would be today after pulling the retirement trigger or working safely from home in this environment. Except for delaying retirement and working from home offers the opportunity to safely live this pandemic restricted lifestyle with a paycheck. 

Opportunity –

Do you even have a choice to stay on the job longer until things pan out? So many people are already being cut loose and collecting unemployment benefits and stimulus. If in this boat, I would think keeping my mouth shut about retirement plans, collecting unemployment, and looking for non-existent equivalent jobs as long as possible would be the strategy to use in this pandemic restricted environment. Even if that meant using some retirement savings to subsidize unemployment benefits until they run out. Only then quietly officially retiring.

If still working, then another reason to maybe keep quiet about retirement plans is there might be recessionary cutbacks in business going forward. This reduced business environment may last a while. Some companies may offer retirement incentives or packages to reduce employee headcount. If you are on the fence it may benefit you to wait and see what happens.

Pandemic Portfolio –

Diversification still matters. I found at the pandemic market’s lowest point in March 2020 that my recession hardened portfolio suffered far less than the S&P 500, DOW, or popular all stock market index funds. Thankfully the market has recovered a bit since that low. But as we’ve witnessed, the slightest hint of coronavirus economic bad news roils the market. That said, during this no end in sight pandemic until a vaccine is available world, I believe in having a sufficient cash bucket within my portfolio. No telling if that recent market floor will be breached and it being long lasting. 

My early retirement story is nothing spectacular and 10 years into it I’m still not old enough for Social Security. But if today I was under age 59 ½ relying on the same early retirement strategy as I was in 2008 then I’d be in real trouble. When looking at today’s super deflated 72t calculated interest rates, it would be difficult for all but those retiring early with million dollar IRA portfolios to rely primarily on a SEPP 72t strategy. Interest rates will have to rise before that can be a viable early retirement strategy for most people today.

Social Life – 

With this pandemic we have all now seen how isolation feels. Along with asking yourself, should COVID-19 change your retirement plans, we all need to ask how we plan to stay engaged in a world pandemic environment. Many people find out at retirement that our social life for the most part revolves around our work. It took me a lot of concentrated effort to expand my social circle beyond work after I retired. I see that everything I did to grow my social network when I first retired would be near impossible to do in this pandemic environment. 

It’s very important when deciding whether to retire now or delay to consider social engagement. If you’ve already built a large local non-work related social circle then this won’t be a major consideration. But if your social life relies on your work pals, I can say from experience that work friends can quickly fall away after retirement. The dynamic of our shared workplace experience ends and that primary bond breaks once we retire. 

We Have To Navigate the Circumstances

This pandemic has not only challenged many retirement plans financially, it has also disrupted retirement lifestyle plans. In the end, a successful retirement is more than just the numbers. What we retire to is just as important to consider in our plan. To avoid retirement regret and second guessing we also need to retire with confidence. That takes looking at all angles using what we know today and what we can logically assume going forward. 

Would my leaving on my long planned for target retirement date in 2008 have caused early retirement failure? I will never know. I do know that other than giving up a year of retirement freedom, my delay didn’t hurt me. It gave me time to get over the shock of an unprecedented world event and time to dig in mentally to what I really wanted. 

I had worked very hard to meet a 10 year early retirement plan. But instead of retiring on a predetermined date, I retired when it was the right time to retire given current unprecedented circumstances. What matters is that I successfully overcame recession related challenges and met all of my early retirement lifestyle desires.

It’s Up To You To Answer The Question

Should COVID-19 change your retirement plans? If you are among the fortunate to have any say in the matter, take your time and look at all the angles before deciding. Explore ways to leverage any opportunity to better your situation. Then jump in with both feet and feel confident in your decision. 

Will COVID-19 Change Actuarial Longevity and Retirement Planning?

Retirement Plan

I just learned that someone I know passed away from COVID-19. He was a successful small business owner in my town and an all around nice 51 year old family guy. I started to think about how we all try to be nice and successful. That and plan to eventually retire and live a long life. I’m thinking out loud, questioning the prospects for a long life. Will COVID-19 change actuarial longevity and retirement planning? Even if official actuarial longevity doesn’t change, with how badly unprepared the world and the USA was for this Coronavirus event, let alone coming disasters associated with climate change, should we even be planning to live much beyond the age of 70? 

Will COVID-19 Change Actuarial Longevity and Retirement Planning?

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Should COVID-19 Change Actuarial Longevity and Retirement Planning?

We are doing everything we can to avoid the virus but we have to face reality. It will never just disappear so infection is inevitable. Our chances only improve if we can avoid infection long enough for a vaccine to be available, successful treatments are developed, or at very least if infected and it’s severe it happens on the down side of the hospitalization curve. Even with access to hospital care there is no guarantee of survival. 

At some point this Coronavirus will punch us all and the older we are the harder it hits. Many people will be infected during the peak. Then not only are the risks of higher COVID-19 fatality rates for the plus 60 crowd still in play, but also the impacts of the critical medical care survival decisions that are being formalized. I live in the state of Colorado and they just released their COVID-19 patient care guidelines. I’m sure other states are doing the same. It clearly shows that when it comes to the nuts and bolts regarding who gets a ventilator or other scarce treatment for a chance to fight for their life, age will be considered during hospital shortages. The older you are the lower down the list you go. 

They will use a version of the Charlson Comorbidity Index.Will COVID-19 Change Actuarial Longevity & Retirement Planning?

Index Source-  (Screengrab from the Colorado Department of Public Health and Environment’s website)

I suppose in this situation you have to make a cut somewhere. We’re all on the COVID-19 Titanic and there aren’t enough lifeboats. Beyond this current crisis there’s no reason to think any future mass event would be handled differently. There will never be enough lifeboats for everyone. But why wouldn’t our retirement planning now have that factored in? It’s no longer unreasonable for anyone who survives this pandemic to consider that the whole country or world can be hit with something again, either natural or unnaturally man caused. When it happens we will all be older too, adding to our life’s expendability factor. 

Looking At Actuarial Longevity Numbers

It was a big enough bummer to contemplate and plan for longevity when thinking we could live into our late 80s or 90s. Looking at the Social Security longevity calculator and plugging in my birth date comes up with their figure of age 82.7. I thought that was far more realistic than age 90, but they always tell us to plan for a long life. I’m wondering how realistic any of that is now. I did have a retirement plan to cover us until age 90. Not that I wouldn’t try to make it to that age if it was up to my own behaviors. But now I feel that regardless of our own actions the decision can be out of our hands the closer we get to our actuarial number. 

There has always been the chance of an earlier death because of things like drunk, high, or distracted drivers; cancer, crime, sharknado, etc. But it somehow feels elevated now. 

That’s why I’m now questioning retirement planning as far as longevity goes and I’m not the only one.

Some actuaries are already discussing longevity hits and CODID-19 impact to annuities and pensions. While others are focusing on how the Coronavirus death rate will impact the healthcare and life insurance side of things. What I have yet to see is anything from the retirement planning side. Too soon? Maybe, but I have a lot more free time these days to think out loud and wonder about things. 

The impacts of a shorter life span on our retirement plan. 

The good news- 

Early retirement may take much less money to pull off. It also means if reaching your mid 70s is about all there is then there may be less reason to wait beyond age 62 to collect Social Security. One less thing to worry about.

The bad news- 

We have to get busy to clear our bucket list because our ticket to leave the planet would get punched sooner than we wish to consider. 

 

It sure would make saving enough for early retirement easier to reach and pursuing FIRE an even easier decision to make. For those already on FIRE, losing 30%-50% of our portfolio in a COVID-19 market collapse wouldn’t be as painful either. Live less, need less.

There should be no surprise that just playing with FIRECalc will show how numbers drastically change with planning for a shorter lifespan. Taking a worse case scenario of an additional 40% loss to my portfolio shows the difference when using my existing spending budget. Age 75 came in at 100% success rate while age 90 came in at 77.7% to 95% depending on when I showed our Social Security would start.. 

What I’m Doing About It

The market has been up and down since the world stood still. It feels a lot like 2008 that way. There will be no surprise if it endlessly keeps doing this or even falls to a new lower floor until a vaccine is available. They say that is still 12 to 18 months off. I’m fortunate in that I have enough cash in my portfolio to go at least that long. Lucky me, in this Coronavirus pandemic my cash bucket might last longer than I do. 

I’ve made sure our Beneficiary designations, Will, and PoA are up to date.

If we had not already gone through the process of having a legal Will and POA drawn up we sure would be busy now getting that done the best we can. Not sure if family law lawyers are considered essential service during the pandemic shutdown. Online options may be one’s only recourse. 

I am not making any changes to anything in my retirement plan yet. 

I’m just waiting this out doing what I can to remain virus free. I am going to hang onto this thoughtline regarding COVID-19 being a longevity threat as a way to cope with any major portfolio losses that may still be ahead. I’ll need less than initially planned once I’m convinced that we will likely die younger than our 90s. Although, I never really thought that we would make it to 90 anyway. There will just be less left behind.

What I will do is pray that the death rate drops way off and the vaccine or treatment comes quickly. 

If not, then I’ll keep an eye on the actuarial expert’s appraisal of longevity. Any changes to lower life expectancy in the actuarial tables may suggest a positive change in people’s pension and Social Security payout. Something that could possibly change one’s retirement planning.

But what I really hope is to avoid the virus and be around to see how they roll out the vaccine once it’s available. 

My dream is the vaccine is found and will be readily available for everyone in an expedited and orderly fashion before the next pandemic round. If it comes with highly limited availability and goes like the handling of Coronavirus testing, or to the WH staff and their donors first (sorry, I’m cynical when it comes to these guys lately), and then rolls out using the way of scarce ventilator guidelines, I will make some lifestyle choices and retirement funding changes while I wait my turn. Something more befitting a shorter lifespan due to being classified as more expendable now and most likely even more expendable going forward for the next cluster-fetch. 

Perhaps I’ll start with an investment into the pleasures of single malt scotch. I might as well enjoy myself while being pushed to the back of the line. I would rather head down to the bar on the Titanic than cling to a side rail in panic during my last moments on the planet. 

Update 4/29/20: Anyone who experiences job loss due to the pandemic can check a new estimated stimulus unemployment benefit calculator. Zippia analyzed each state’s unemployment policies to determine how much unemployed workers can expect to receive under the coronavirus stimulus by state and salary. Remember, in addition to state level benefits, unemployed workers now receive an additional $600 a week for the next 4 months regardless of income. (The calculator is not a paid or sponsored link)

Planning for the Future While Living with a Disability

Health, Retirement Plan

 

Thinking of your eventual mortality isn’t a happy ordeal, but it’s a necessary one to ensure your care and comfort later in life, as well as taking care of your loved ones after you’re gone. When you are living with a disability, it is even more important to make sure you are provided with the appropriate care. According to the Council for Disability Awareness, most Americans live paycheck to paycheck, meaning there is little or no money left for unexpected emergencies like an injury or illness. A recent report released by the National Disability Institute found that 12 to 19 percent of Americans with disabilities are far more likely to live in or near poverty than other Americans, and are more likely to say it’s “very difficult to cover monthly expenses.”

So, what can you do now to prepare for later? Have a plan.

Planning for the Future While Living with a Disability

Photo by Anthony Metcalfe on Unsplash

The importance of planning

Financial planning for your elder years and beyond may seem overwhelming and mundane, and you don’t really know where to start. The first step toward any planning approach is to identify and prioritize your goals. Have a vision of your family or loved ones in mind today and when you’re gone. What do you want for them? What do you want for yourself?

Invest in insurance

One of the greatest gifts you can give your loved ones is making your funeral arrangements in advance. This takes the stress off the shoulders of your grieving loved ones after you pass, and ensures your wishes are followed through. 

One common concern for people living with disabilities is getting insurance. Life insurance and disability insurance are particular concerns. Fortunately, having a disability doesn’t automatically prevent you from obtaining these types of coverage. In addition to regular life insurance, you may want to consider burial insurance, a type of funeral expense life insurance policy designed to cover the cost of your funeral (funeral costs average between $7,000 and $10,000) or cremation expenses when you die. 

After your death, burial life insurance pays the death benefit of your policy directly to your beneficiary, who can use the money in any manner, including for outstanding medical bills and legal costs. When deciding on how much coverage you will need, it’s important to take into consideration what kind of funeral and burial arrangements you want, and if you want any additional funds to cover any other debts you may have.

Build your financial accounts

People living with disabilities often accrue higher living expenses. For example, if you need to remodel your home for your disability, this work can cost tens of thousands. So, it is crucial for people with disabilities to have the skills that help them manage their finances so they can live fulfilling lives and ensure their loved ones aren’t stuck with a financial burden. Reducing debt, setting up an emergency fund, being properly insured, and investing in a retirement account are all ways to plan for your future. 

If you don’t know where to start with these important action items, you can talk to your bank’s financial advisor, which is usually free to clients. Knowledgeable with certain information and resources about the benefits and tools available to you, any financial planner can help families planning for the future get started on the right path toward financial security.

 

Being prepared and having an end-of-life plan that carries out your wishes for your care, your estate, and your funeral arrangements is an important task in anyone’s life. Living with a disability adds to the challenge, but it doesn’t make it impossible. Taking control and planning for your future now secures your comfort and care when it will matter the most. Of all the things you can do for the people you love, having your final arrangements made and ensuring costs are covered is one of the best things you can do for them and yourself. 

This informative post was contributed to Leisure Freak by Ed Carter –

Ed Carter has worked with clients of all ages, backgrounds and incomes. About 10 years into his career, he saw a need for financial planners who specialize in helping individuals and families living with disabilities.

How I’ve Managed Income During Early Retirement

Bucket Strategy, Funding Retirement, Retirement Plan,

One of the challenges to early retirement is figuring out how to develop a reliable long-term income strategy. After decades of clocking-in and receiving regular paychecks for our efforts, retirement brings a totally different way of living both mentally and financially. This was something I worried about before retiring. As I approach my 10 year FIRE anniversary I thought I would share how I’ve managed income during early retirement. I’ve found that it isn’t rocket science even without having a million dollar plus retirement portfolio. It takes having the discipline to stick to an informed and verified plan. A plan that is monitored during retirement and allows for flexibility to adjust as required when conditions or projections change.

How I’ve Managed Income During Early Retirement

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The Way I Managed Income During Early Retirement 

Basic principle: Income during retirement must be greater than or equal to (>) lifestyle budget

There was no extreme early retirement strategy. We chose smart frugal living to save money and lived our retirement lifestyle for many years before we retired. We understood what and how we liked to live. A big part of our strategy was developing a split budget based on our different incomes. We then saved enough to support our individual budgets in retirement. This gave us a solid understanding of what it cost to both sustain and enjoy our chosen lifestyle. With that in mind we based our early retirement funding needs on that budget. 

Early retirement income sources: Where our income comes from now and later

When we retired almost all of our retirement savings were in 401K, IRA, and Roth IRA accounts. We then rolled our 401K account funds into IRAs. In my case I was age 51 and my wife retired a few years later at the age of 58. We also had some cash in savings accounts. Our income during early retirement would come from our IRAs and the cash savings. Later we will have Social Security to also provide retirement income and lower our savings withdrawal rate. 

Withdrawal plan: Establishing a sustainable withdrawal rate

We knew what we needed to receive in income during early retirement since our budget was well known. Instead of settling on the often touted 4% withdrawal rate plus inflation each year we used our required budget amount. Then calculating its probable sustainability in retirement calculators (FIREcalc) using our portfolio amount and estimated future earned Social Security income.

My initial withdrawal rate was about 4.6% and my wife’s initially 6% of her holdings. Hers would only be that higher rate for 4 years. Then her withdrawal rate will drop to 3% once her social security payments begin. My withdrawal rate has dropped over the years. It will also decrease to an estimated 2% range once we’re eligible for Medicare and when I begin Social Security at full retirement age. This along with historical investment cycles was considered in the calculation when using the retirement calculator resulting in 100% success. Basically we accept having a higher withdrawal rate early in retirement for a short period of time with lower withdrawal rates later once our earned Social Security and Medicare is available.      

Retire early and often: Where any earned money during retirement goes

I had always considered pursuing opportunities of interest and passions in early retirement. My retirement lifestyle was funded by my IRA so anything earned was extra money. Any earnings from my retirement gigs and a short encore career were saved in new 401K accounts, used to pay off our small mortgage, and put into a savings account as cash. 

Portfolio income distribution: It’s a bucket thing

We use a portfolio bucket strategy to provide income during early retirement. Within our retirement funding IRA is a cash bucket that we receive our monthly direct deposit distributions from. As with our budget, we keep separate bank/credit union checking and savings accounts where our individual IRA monthly distribution goes.

Our portfolio is diversified with various stock and bond funds. All interest and dividends are directed to the cash buckets. Selected assets are occasionally sold to maintain our desired cash bucket amount. When I was working through my bucket list of paying opportunities my portfolio’s cash bucket was 6 to 8 months of my income distributions. Now that I have worked through my list and I’m no longer actively pursuing paid adventures my IRA cash bucket strategy is to have closer to 2 years cash, as is my wife’s.

Unspent monthly distributed money that we receive is saved in our bank savings accounts to be used as needed when monthly expenses exceed our distribution amount. Such as in months when annual property taxes or bi-annual auto insurance are due and our travel months. I also keep nearly 2 years cash in savings and CDs. If/when I take on a new paid adventure then cash/bucket adjustments can be made. 

Getting income during early retirement without penalty: Pre age 59 ½ access to retirement accounts  

Most of my savings was in tax deferred retirement accounts. My early retirement strategy relied on the SEPP 72t (Substantially Equal Periodic Payment) rule to get penalty free distributions before age 59 ½. I took a chunk of my portfolio to set up an IRA and locked into a SEPP 72t at the age of 51. It provided a fixed monthly distribution until I reached the age of 59 ½. I used these distributions to fund early retirement and paid income taxes based on my income tax rate for the year.

When I worked in paying opportunities I routed those employment earnings back into savings and mortgage elimination. My wife stayed working until age 58 to reach her 20 year service anniversary which gave her some retirement benefits. She saved 2 years of retirement funding in her savings account and didn’t need to begin IRA withdrawals until age 60 when the early withdrawal penalty would no longer apply.

Managing Taxes: Starving the Tax Monster

I purposely try to under-withhold taxes within the underpayment thresholds to avoid penalty. I never want to get a tax refund. Even though a savings account pays little interest it is still better than an interest free loan to the government. Not to mention delayed refund potential due to all the tax filing fraud that seems prevalent. When I work in paid opportunities it does raise my tax rate. I would set my W4 to withhold taxes at the single rate with 0 allowances to withhold the maximum. My portfolio distributions has a tax withholding of 10%. Even with that, when I worked in retirement I still owed money at tax filing time.

Without paid work our real tax owed is 5% to 6% of total retirement income. Our IRA financial planner’s system only supports 10% + withholding for federal taxes. So I suspend tax withholding on our IRA distributions from January through June and then have them apply the 10% withholding rate until year end. This works out where we owe a very small amount at tax filing time. We have no State tax withheld from our retirement income but fortunately our low taxable income means only paying at most a couple of hundred dollars a year. 

Social Security Income: We earned Social Security by paying into it and plan on getting it

Social Security seemed so far off when I first retired almost a decade ago. Now it is knocking on our door. Aside from all the strategies to maximize Social Security, when to apply and receive benefits is a very personal thing. We have run the numbers through every scenario on retirement and Social Security calculators. Based on our lifetime income differences and thus the resulting benefit amounts between my wife and I, our plan is she begins her benefit at age 62 and I wait until Full Retirement Age (FRA) 66.7. That time is still years away and I can decide then whether to wait until age 70. It will all depend on whether we need it due to market and portfolio conditions or any changes to Social Security that may come. 

 

That’s it in a nutshell. As you can see there’s nothing complicated. 

Dreaming of Retiring in Your 40’s? These 5 Tips Can Help

Retire Early, Retirement Plan,

To retire at an early age of 40 something is a dream cherished by many. With a proper strategy, the financial planning hurdles can be tackled to create a substantial pool of retirement savings. Right from choosing the best retirement plans to cutting down on unnecessary expenses, saving for retirement requires knowledge and insight. If you too are working towards retiring in your 40’s, the 5 tips described below can prove helpful. 

Dreaming of Retiring in Your 40’s? These 5 Tips Can Help

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1 – Lookout for Taxes

It’s important that your investments are tax-efficient. You can save as much as is possible for you in 401(k), IRAs and other such options. With these options you can save more and grow your savings faster so that your retirement fund gets a boost. You can even benefit from the employee-sponsored 401(k) where your employer matches your contribution in your retirement account. The traditional 401(k) allows you to make either pre or post-tax deductible contributions and earnings are tax deferred until withdrawals/distributions. On the other hand, the contributions you make in a traditional IRA account are generally tax deductible and withdrawals or distributions are taxed. IRA vs. 401(k) is a perennial question. The best retirement plans are those which suit your financial health and the type of retired life you wish to live. 

 

2 – Save Half or More of Your Salary 

Generally, a majority of college graduates enjoy the peak salaries during their 40s. If they choose to retire at 40, they are curtailing savings by not contributing towards the retirement accounts during peak earning years. Besides, retiring at 40 also means you would have no access to Social Security or Medicare for at least 12 years into retirement. This would leave you with one less source of income and one more bill to foot during retirement. Also, the Social Security benefit will be reduced due to the lower average earnings when you actually attain full retirement age. Hence, if you want to retire early, you need to save 50% or more of your salary every year. 

 

3 – Invest Smartly 

Compound long-term growth investments are what you need if you wish to retire early. Otherwise, you may never reach your retirement savings goal or can run out of money during your retired life. Choose to be as aggressive with your investments as is possible for you. You also need to start investing as early as possible. Remember, the longer your investments have time to grow, the more likely it is that they would match the stock market’s long-term average return. 

 

4 – Avoid Unnecessary Expenses 

You can save money by cutting services which you pay for but do not use. Consider cancelling the subscription to that magazine which you never read, or the gym membership if you haven’t gone to the gym in months. The more such unnecessary services you cut off, the more money you save. 

 

5 – Get Rid of High-interest Consumer Debt

It’s best to free yourself entirely of any high-interest consumer debt or at least maintain a low debt-to-income ratio. Few debt obligations for real assets such as a primary residence or rental properties are exceptions as long as their monthly debt payments are low. If you plan on retiring in your 40’s, a 20% or lower debt-to-income ratio is advisable. 

 

Pro-tip: Your lifestyle expenses before retirement have a huge impact on your retirement savings. Minimalistic lifestyle can help you save more and faster for retirement. Besides, maintaining a simple lifestyle will attune you to a comfortable lifestyle post retirement even with fewer funds. 

 

The risks associated with early retirement cannot be completely mitigated. However, you can be foolproof with you plan. You can also seek professional help to test your investment portfolio in order to ensure that you are on the correct path.  

 

This informative post was contributed to Leisure Freak by Rick Pendykoski.

About the author:

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as MoneyForLunch, Biggerpocket, SocialMediaToday, WealthManagement, SeekingAplha, and NuWireInvestor. If you need help and guidance with traditional or alternative investments,  visit  www.sdretirementplans.com.

Ditch The FIRE Movement? If Dissatisfied Then You’re Doing It Wrong

Budgeting, Frugal Living, Retirement Plan, , ,

It’s one thing to be a conforming consumer. Blind to the trappings of debt and undisciplined spending. Least forget the unending cycle of unrewarding work needed to support it. But it’s another thing when folks walk away from FIRE dissatisfied after they’ve been awakened to the possibilities of financial independence and maybe even an early retirement. If you’re dissatisfied and have decided to ditch the FIRE movement, then maybe you’re doing it wrong. 

Ditch The FIRE Movement? If Dissatisfied Then You’re Doing It Wrong

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There’s a lot of impressive FIRE stories to be found. 

The FIRE pitch is seductive. A glorious freedom lifestyle awaits all who dare challenge society’s consumption, employment, and retirement norms. We can be inspired by other’s FIRE success. There are some amazing people who are in their 20s, 30s, and 40s saving as much as 70% of their incomes to build a portfolio that’s at least 25 times their annual lifestyle expenses. 

They hit their numbers and retire early to live off their chosen safe withdrawal rate doing whatever their passions direct them to do. Many even taking on side hustles or other paid opportunities aligned with their interests. After all, a FIRE Retirement is the absence of needing to work, not the absence of working. It’s easy to fall in love with matching their success formula. 

Stop Keeping Up With The Jones’s and FIRE’s Most Famous

FIRE walkers fully accept the concept of not wasting time and money trying to keep up with the Jones’s. But sometimes that concept is ignored when it comes to creating a FIRE strategy. Especially if trying to reach the common FIRE before age 50 goal. 

The problem is that not everyone can match what some of FIRE’s most famous have done in a long-term sustainable manner. Either because of income or frugality. It’s clear that a plan that goes too soft will mean little seen as financial progress. But pursuing an aggressive FIRE plan based solely on the success of our FIRE superheroes can be a recipe for disillusionment. Go too far for too long and feelings of a living a deprived life creep in. The thought of living that way for the rest of one’s life can be daunting. 

Don’t Ditch The FIRE Movement. If you don’t like the taste, just change your recipe

There are no FIRE rules but you can still be approaching FIRE the wrong way. Not wrong as far as anyone else is concerned, there are no FIRE police. Just wrong as far as how your approach to FIRE impacts you. I came across a post by Ben Le Fort that lists the Ten Commandments of FIRE. Personally I prefer to use Tenets over Commandments but it captures in detail the following for anyone who wants FIRE:

The 10 Commandments of FIRE
  1. Thou Shalt Calculate your Savings Rate
  2. Thou Shalt Track thy Expenses & Create a Budget.
  3. Thou Shalt live a Frugal Life
  4. Maximize your Income
  5. Thou Shalt Not fall Victim to Lifestyle Inflation
  6. Clear your Debts
  7. Thou Shalt max out your tax-Sheltered Accounts
  8. Minimize your Investment Fees
  9. Thou Shalt not try to time the Market
  10. Talk About Money

There’s nothing pushing FIRE walkers to unsustainable extremes other than themselves

These FIRE tenets are not extreme unsustainable principles. But it’s easy to push too hard when being fueled by not only what we see others have done, but also the intoxicating thrill of watching the snowball effect destroy debt and grow wealth. However, we must logically define what we can realistically support and want for the long-term. Our limits in income and frugality need to be leveraged to our full advantage. But that must also come with the goal of living a happy life. 

From the stories I read of folks who decide to ditch the FIRE movement, I see in their complaints that everything they did was concentrated on numbers. They lamented cutting and living without things that brought them joy. Their plan left out that very personal component of a happy and enjoyable life of which only we can test and measure.

Create a plan that allows you to still enjoy the ride

Forget about having a take no prisoners plan. 

FIRE includes making lifestyle choices to optimize our savings rate. We decide what brings value to our life and cut the waste. Figuring that out isn’t always clear. We should push hard against our frugal thresholds without overly breaking them because it leads to feeling like we are living a deprived life. 

I know from experience that I won’t always know what that frugal threshold is until I break it. Then it’s time to adjust and back off a little until the real threshold is revealed. 

The idea is to create a sustainable lifestyle for the long-term that we want to live with now and after we ditch the rat race. Some of us aren’t happy or ready for a life where we never go to a coffee shop, out for a meal, attend a concert, or hit a movie. We should have a plan that allows for the little things we enjoy doing, but done in a thought out balanced way. Constantly test your frugality thresholds. 

FIRE and career can be worked on at the same time.

It’s OK to enjoy and even love what you do for income. Our jobs are key to reaching FIRE. Make decisions that best leverages your personal finances, career moves, and your life’s happiness when pursuing FIRE. We should be driven to improve our career prospects but don’t let numbers alone drive you. Watching a growing portfolio will not make you happy if you hate your budget and/or job.

Stop comparing and trying to keep up with FIRE’s most famous

Sometimes it seems like there’s a race to see who can retire the youngest or spend the least. Extreme stories are amazing and inspirational. But those stories aren’t going to be a one size fits all FIRE solution. Instead they should inspire ideas that can be used in a sustainable way for your own plan. 

We all have unique parameters to work around from income and frugal thresholds to the cost of where we live and family size. You can’t buy back years of regret, for either going too soft or too hard in your FIRE plan. Find your own sweet spot.

Create a FIRE Optimized Lifestyle You Look Forward to Living

I’m no certified expert, just someone who retired early at age 51 nearly a decade ago with an ordinary FIRE story. We did use frugal living to boost our savings rate. Over my 10 year early retirement plan we cut waste and tweaked our budget. We kept the things we valued that added to our happiness. In some cases we found that some things we cut was actually worth paying for and brought them back. Through it all we created a smart frugal and balanced lifestyle that got us the increased savings rate to retire early while still living the lifestyle we wanted to live. Both during the FIRE journey and now in early retirement. 

If in your FIRE journey you have apprehension and concern of forever living a deprived life by pursuing FIRE, then you’re just doing it wrong. Instead of deciding to ditch the FIRE movement, make necessary tweaks when feelings of austerity and deprivation hit. Always make sure that any tweaks are well thought out so that they don’t overly undercut your savings rate. For most of my tweaks it was just a matter of using sometimes instead of never or always to find the right balance. 

FIRE Is A Worthy Goal 

Even if you can’t win a race for the earliest FIRE age, doing the best possible for you is always financially better than doing nothing. Your Future You will certainly appreciate it.

Why I’m Fascinated With Dividend Investing

Income Streams, Investment Strategy, Retirement Plan, Risk Tolerance

I’ve been fascinated with dividend investing for many years. It goes back long before I started my journey to financial independence and early retirement. It seems so simple. You buy a company stock that is stable and has dividend history on their side. A stock that figures for a potential future of continued business with dividend and stock growth. They then return to their investors a dividend that can either be reinvested to buy more of their stock or distributed as cash. My wife and I have financially benefited from dividend investing. We have dividend stocks in Mutual Funds and ETFs¹ within our portfolio. We have also benefited from growing wealth with reinvestment and harvesting distributions by owning individual stocks within our retirement accounts.

Why I'm Fascinated With Dividend Investing

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Some Folks Aren’t As Fascinated With Dividend Investing As I Am

Dividend focused investing doesn’t thrill everyone. A quick internet search will reveal opinions where fans of dividend investing will explain how they build their wealth and even divulge their monthly passive dividend income. You can also find just as many who aren’t fans of dividend investing who will explain why growth stock investing is the best and the only way to invest. 

The real appeal I see with dividend investing is that we have options to how dividends can be used depending on our financial situation. At least that’s my argument for using dividend focused investing as part of our retirement portfolio strategy. For those dividend investing naysayers who tell me to just buy some bonds, well I do have bonds as part of my portfolio diversification² strategy. They just don’t do it for me like dividend paying stocks do. Bonds feel like a loan I’ve made, one that can be paid off early. Once mature I get my money back but then other bonds have to be bought to replace them. Dividend investing feels much different. I like owning a piece of the company.

My Story With Dividends

Using dividends to pay down debt

All of my 401K match was in company stock in the first 20 years of my career. That was before my company was eaten by a growth company. There was no option to reinvest so every year I would receive an end of year dividend distribution. What I did was add it to my house payment and applied it to my mortgage principal to pay off my mortgage faster. It equated to about 3 months in additional principal payment. It was a painless way to reduce what I would end up paying in mortgage interest. Which at the time was at the going rate of 8%. Wow!

Reinvested dividends to increase wealth until needed for retirement

Today my wife enjoys a quarterly distributed dividend in her early retirement from her old ESOP. It is part of her retirement funding. The dividends come from owning her employer’s stock. Existing share to dividend yield is 5%. Over her career she had her investment split where 50% was invested in their Class A shares which reinvests dividends and 50% in their Class B shares that distributes quarterly dividends. 

After 20 years of equal amounts invested, the dividend reinvested Class A shares fund has 71% more in it than the Class B side of the account. It shows that even with a stable value stock that’s unlikely to rocket in share price appreciation, reinvested dividends do work through compounding to increase overall wealth until electing to use dividend distributions as part of a retirement income strategy.

A friend’s investment move that feeds my fascination with dividend investing

A company executive that I worked with told me something regarding dividend investing that seared into my brain. It was March 2009 and I lamented my portfolio losses right when I was planning to retire early. He had pulled out of investments in 2008, several months before the market found its bottom. He was planning to retire in 3 years while in his lower 60s. He told me that he just moved $800,000 of cash holdings to be split between AT&T (T) and Verizon (VZ). At that time their stock price to dividend yield was about 8%. It was a risky move, even with understanding the telecom industry we were part of, but he told me: 

I don’t care if these stocks ever rise another dollar. I am locking in at an 8% return. I will reinvest the dividends until I retire and then take distributions to use for retirement income. 

Both stocks have climbed since then³. A quick look at AT&T shows it was $25.XX a share around that time and recently traded at $33.70, about a 30% increase. Its current dividend yield is in the 6% range. Verizon was trading then at $28.XX, now $57.37, a 101% increase. It’s current dividend yield is 4.26%. Was he lucky? Genius? Stupid? Risky? Whenever I tell this story I hear it all. Personally, I wouldn’t risk going all-in with a large sum like that on two dividend paying stocks, especially within a single industry segment, even if I had an equal amount to invest elsewhere. 

But here’s the overall message that I took from him. 

What imprinted on my brain is the concept of being satisfied with locking into a return based on the share price to dividend yield percentage you buy in at. That is of course as long as the dividend payout is sustainable, which is always the question. With this mindset, any stock price appreciation is just gravy. In a way, dividend investing with this mindset is like having an annuity that you can sell out of at the stock’s share price whenever you feel you should, need to, or want to. 

What To Consider When Buying Dividend Stocks 

Sustainable Dividend

A key aspect of dividend investing is owning stocks in healthy companies that can sustain the dividend it pays for years going forward. This takes analysis of the industry, company prospects, direction, management, financial strengths, etc. 

Dividend Payout Ratio

How safe is the dividend? Look at the payout ratio, the percentage of company income the company pays out in dividends. Having too high a percentage could spell trouble. There isn’t much left for the company’s retained earnings to promote growth. A lower percentage can mean there is sustainability and room for dividend and/or stock growth but may be too little to meet our goals.  

Avoid High Yield Seduction

Don’t be blindly seduced by high yield dividends. Safe, sustainable, and reasonable are the goals. Some high yield dividend stocks are risky. If the numbers don’t add up for the business or industry sector there is a chance the company will have to cut its dividend in the future. If that happens the market can sour on the company, causing the stock price to significantly drop too. Meaning we not only lose the high yield dividend we were chasing but also experience a loss in share value. 

Diversification

Keeping a diversified portfolio is still the goal. It’s ill advised to go all-in with a single dividend paying stock or even stocks within a single industry. The amount of dividend stocks we add to our portfolio should fit within the portfolio’s overall diversification strategy. One that’s aligned with our risk tolerance and goals. 

Buying Dividend Stocks

A Common Method of Dividend Investing is Buying an ETF 

Exchange Traded Funds are bought and sold like stocks. The single ETF contains many company stocks but is traded as one under its own stock trade symbol. They aggregate the various company dividend yields. Buying an ETF takes away all the required company stock analysis of dividend investing out of the equation as they are invested across entire indexes. 

Some high dividend yield ETFs emphasize holding large-cap equity stocks that are forecasted to have above-average dividend yields. They may have aggregated ETF dividend yields in the 3.3% range. Others provide a convenient way to track the performance of company stocks having a record of growing their dividends with ETF aggregated dividend yields around 1.85%. 

Seems simple enough. Go to any of a number of brokers who offer Dividend focused ETFs, select the index or type that meets your needs, and happily collect or reinvest your dividends. However, what we gain in convenience and possibly lower risk we lose in stock holding selection. That and the possibility of getting better stock appreciation and yields that better meet our individual goals if we had a more targeted investment approach. ETFs are a low cost but broadly spread out investment choice. Not that there’s anything wrong with that.

Buying and Owning Individual Dividend Paying Company Stocks
DIY Stock Purchases

If we’re able to do all of the company analysis ourselves, then picking individual dividend stocks to build our dividend investment portfolio is another option. This way we can concentrate on the companies and industries we believe have long term sustainable dividends and the business potential for possible stock and dividend growth. We could also craft a higher dividend yield portfolio.

Once decided on the companies, diversified investment strategy, and dividend yields that meet our goals, just open a brokerage account. Choose an online low cost brokerage like Ally Invest where each stock trade is a flat $4.95. These types of online brokerages allow for dividend reinvestment or distribution. But if planning smaller monthly deposits, take into consideration that low flat trade fee could add up if we’re constantly buying various stocks to build up our diversified dividend investment portfolio.

With this approach we will have to manage our portfolio ourselves. Looking for signs of future company dividend distress, business pressures that can affect stock value, etc. Also needed is yearly portfolio rebalancing* analysis and making any necessary trades to bring it in line with the overall diversification strategy.

CFP Managed Portfolio

Including a dividend investment strategy through a Certified Financial Planner (CFP) is another option. They can work with us on the company stock analysis and diversification strategy. There will be obvious CFP type fees to pay. Depending on our portfolio size those frees can range from 1% to 2% or more plus any brokerage trade fees. 

It does however mean that their knowledge and systems are in place to handle our rebalancing. They are also able to setup a dividend investment portfolio aligned with our goals and within our risk tolerance.

Online Robo Advisors Specializing In Dividend Investment Stock Ownership

There is a newer robo stock dividend investment option. Instead of our having to do all the important stock and sector analysis ourselves, they take care of that and offer dividend focused stock ownership. Rather than having a broad stroke index investing strategy as with ETFs, or paying a CFP’s high fees, they can build a dividend investment portfolio owning company stocks that is focused and tailored to our goals. Also one that’s within our risk tolerance, all without the higher CFP type fees. 

Like any stock investment, dividend investing has risks 

The rules of the investment universe are always with us. Even with complete and proper analysis, there’s no guarantee that investors will get the same results of a stock’s history, its expected returns, or dividend rate going forward. There’s no guarantee stock investors won’t lose money either. Investors should always consider the risks of any investment being made and remember the general rules of investing- Higher expected returns usually comes with expected higher risk. 

Having a diversified portfolio within the investor’s risk tolerance that’s aligned with their unique financial situation is always advised. That investment balance includes considering the allocation of both growth and value (dividend) stocks. 

_________________________________________________

  •  1.Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
  • 2.Asset allocation and diversification do not guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.
  • 3.Past performance is no guarantee of future results.  The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
  • 4.Rebalancing/Reallocating can entail transaction costs and tax consequences that should be considered when determining a rebalancing/reallocation strategy.

 

Enjoying Retirement With A Pension? Beware, Treasury Opens Door For Trouble

Funding Retirement, Pension, Retirement Plan, Risk Tolerance, , , ,

Fortunate are those who can enjoy retirement with an employer monthly pension check. Especially from a fully funded pension plan. After years of dedicated service to an employer, the hard-won guaranteed retirement income for life is a valuable asset to have. Even if you don’t have a pension, you probably know a loved one that does.

Something happened on March 6, 2019 without any big announcement or fanfare – The TRUMp administration Treasury rolled back a retiree protection that had been put in place to head off abuse and scheduled to be cemented into policy. They ended rules preventing companies from buying out their retired employees monthly pension with lump-sum offers. Now the door is open for trouble down the road for contacted retirees who fail to properly evaluate and act when confronted with a pension buyout offer.

Enjoying Retirement With A Pension? Beware, Treasury Opens Door For Trouble

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Retirement With A Pension Is Now a Rare Benefit To Have

Companies have been cutting and ending pension benefits for decades. The pension promises to long-time employees are often broken, from benefit qualifying rule changes to bankruptcy reorganization. But even those who have retired with their earned monthly pension can be caught up with corporate efforts to reduce keeping up their end of the bargain. With today’s corporate environment and leadership dynamics, corporations just don’t want pension obligations on their books.

The corporate tool used to shed existing pensioners from their books was to off-load them to an insurance company through what is called pension de-risking. Instead of retirees having a monthly pension guaranteed by the PBGC, with de-risking they were moved to an insurance annuity with their limited annuity protections. But now corporations will have another available tool to rid themselves of pensions, they can make offers to buyout existing retiree pensions with what may appear to be a generous lump-sum. But is it really all that generous?

Why Does Offering Lump-Sum Pension Buyouts Open The Door For Trouble?

What’s the big deal? Many who have a pension benefit are allowed to make a decision at retirement time whether to take a lump-sum or the monthly annuity. They are often not equal, with one having a greater value than the other. There are a lot of considerations that depend on your unique situation to make that decision, like longevity and personal financial discipline.

Those same considerations are necessary for anyone contacted during their retirement with a pension buyout offer. But not everyone was given that annuity vs lump-sum option when they first retired and may be caught off guard. Being contacted now mid-retirement may be the first taste of this critical decision.  

What Needs To Be Considered

First, don’t be fooled by what looks like a huge lump-sum number. Fixed guaranteed monthly retirement income is a luxury that’s expensive to replace. The number offered is most likely insufficient to be fully equal to the real value of your monthly pension. Not to be cynical, but we need to consider that the lump-sum pension buyout offer isn’t out of love for the retiree. Also, especially with this administration, nothing is done by government unless- One, it is politically advantageous, or Two, it was heavily lobbied for by corporate special interest. This pension protection roll-back smells like number Two is smeared all over it. With that in mind….

Check The Lump-Sum Buyout Amount Through An Annuity Calculator

The lump-sum offer is supposed to replace your monthly pension. See if it is by checking an annuity calculator to verify if it could replace your full pension payment amount. Not that you want to take the lump-sum buyout to replace it with an annuity. But instead to see just how close the lump-sum amount is to being able to do so. Use your pre-tax / pre other deduction full pension payment amount. Include in your annuity comparison extras your pension may have like a survivor benefit, inflation protection, etc. The idea is to figure out if the lump-sum amount is really a good buyout offer that fits your unique retirement needs or quickly see if it’s a low-ball attempt to be rid of you.

Retirement Health Insurance

If you have a retirement health insurance benefit, then your premium is most likely deducted pre-tax from your pension check. Accepting the lump-sum buyout offer means your insurance premium would now have to be paid with after tax money from other sources. It might be very difficult to qualify for the schedule A medical tax deduction at tax filing time. Depending on how much you pay this may be something to take into consideration.

Get An Idea About Your Pension Health

As a retiree you most likely get a yearly update about your pension plan financials. Whether your pension plan is fully funded or underfunded, it may play into your decision. If it is underfunded and headed for failure it is guaranteed by the PBGC. You might want to see what the maximum PBGC payout amounts are for your situation if it was to ever go into default. Do some research to understand where the plan stands and where you stand if the worst should ever happen to the pension plan.

Run The Lump-Sum Amount Through A Retirement Calculator

A big lump-sum might look like a fantastic offer but will it be enough to continue funding your retirement?  You must roll the money into an IRA to defer being immediately taxed. It’s then part of your overall portfolio. Run your numbers through a retirement calculator to make sure it can even meet your needs for as long as you are on the planet.

Self Assess Your Risk Tolerance

Accepting the lump-sum buyout offer means increasing risk in your retirement funding. That’s the whole point of companies making these offers in the first place. It’s all about moving the risk from them to the retiree. There can be rewards with an invested lump-sum if market conditions are favorable. But the opposite happens during market and economic downturns. Decide if that is something you can or want to handle in retirement.

Evaluate Your Health and Longevity

If your health is failing then you might be tempted by a lump-sum buyout to leave something more behind for your heirs. There are also long-term care considerations. If you have no long-term care plan, your State may treat monthly pensions differently than lump-sum assets held in an IRA when it comes to Medicaid.

Talk With A Trusted Certified Financial Planner

Consult with a CFP before making any moves. They can weigh in on the offer and provide insight into other things that should be considered. They can show you the best portfolio diversification strategy to use. You can also see whether your risk tolerance favors either staying in the annuity or taking the lump-sum buyout offer. After all, you want to enjoy your retirement, not worry about your finances.

 

Don’t blindly believe a slickly worded pension buyout offer or any hard-sell limited time offer pressure. Do your research and consult with a CFP professional. The last thing anyone wants to do when contacted out of the blue with a pension buyout is to later end up regretting their decision.

How Does Early Retirement Zero Earnings Impact Social Security Estimates?

Funding Retirement, Retirement Plan, Social Security,

Here’s How Mine Went

One of the knocks on early retirement is how it can negatively impact one’s future Social Security benefit. My recent Social Security estimate with zero earnings going forward is somewhat surprising. We pull our Social Security estimate to get an idea of what it will be. We then can use that information in our retirement plan and plug it into our favorite retirement calculator. It’s quite obvious when looking at our SSA estimate that claiming our benefit early at age 62 will result in a lifetime of lower monthly payments.

Choosing early retirement means we have decisions to make about when to claim our future benefit at age 62 or later. But how accurate is our Social Security estimate? The problem is that it uses something that’s a little less clear. It has a line that says: Your estimated taxable earnings per year after 2019……………..$XX,XXX. It uses our prior year’s earnings in the benefit calculation going forward to the reported filing ages to come up with the estimated age based payment results.

That earnings part of the Social Security calculation will be lower than the optimistic forward earnings estimate they used when it drops to a lesser number or to NONE once we retire early. Based on that sometimes overlooked line, one would expect that our received benefit may be lower than what we are looking at and used in our pre-retirement planning. But how much lower?

How Does Early Retirement Zero Earnings Impact Social Security Estimates?

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My Social Security Estimate With Zero Earnings

There are a lot of moving parts to how our Social Security benefit is determined. It’s presented to us in today’s dollars so we can make a mental association. We get a monthly benefit figure for age 62, our Full Retirement Age (FRA), and age 70. Before I reveal my numbers it’s important to understand the basics of how our Social Security is calculated. At a high level it has 4 components that go into it.

1- Social Security Payment Years

To qualify for Social Security benefits we must have had at least 10 years of paying into it through accumulated work time with a significant amount of earnings. The benefit is calculated based on the highest 35 years of earnings. If we have less than 35 years of paying into Social Security then $0 is used for the deficit number of missing work years and averaged for our benefit calculation. But it is more complicated than just that.

2- Surprise! Social Security is means tested through PIA

Primary Insurance Amount, aka PIA, is a weighted formula that gives higher Social Security benefits relative to overall career earnings for lower earners than for higher earners. The PIA formula uses what’s called your average indexed monthly earnings (AIME) in the calculation.

3- Our ancient salaries of decades past are normalized for inflation with AIME

The Average Indexed Monthly Earnings, aka AIME, is an inflation adjustment that uses wages instead of consumer prices. It reflects the U.S. economy’s average wage to normalize our years of earnings. It‘s done by indexing that puts our earnings in a comparative basis within the earnings level of the US by using the average wage indexing series. I have yet to find all the parameters used to get the actual index factor Social Security applies in our estimate against long past earnings years. Not surprising since it would change yearly as our estimate is always updated to be presented in today’s dollars.

4- Bouncing our AIME against PIA

The PIA is calculated using our highest 35 years of wage-indexed earnings and if we have less than 35 years then those missing years will be marked as $0 to make up 35 years. It is then averaged out and expressed as a monthly amount. That average amount is our AIME. Our AIME is then bounced against the PIA. Within our AIME amount the PIA applies a graduated percent of benefit. It goes from the lowest earnings bracket up to higher earning brackets. There are bend points within the PIA formula which represent earnings segments. The PIA formula gives 90% of our AIME for the first segment. Segment one is currently the first $826 of our monthly AIME. The next earnings segment between $826 and $4,980 is at 32% of AIME. High earners with AIME amounts above $4,980 get 15% of their AIME in the last segment.

For example, If our AIME is $5835. Then segment 1 is $826, Segment 2 is $4980, and Segment 3 is $29 ($826+$4980+$29=$5835). Our PIA bend point/earnings segment 1= $826 X 90% = $743. Bend point/earnings segment 2=$4980 X 32% = $1594. Bend point/earnings segment 3=$29 X 15% = $4. Total PIA benefit is then $743 + $1594 + $4 = $2341 per month.

Should Future Earnings of NONE Impact Our Social Security Estimate?

It’s easy to believe that having zero earnings going forward will impact our Social Security estimate. We are most likely earning far more later in our careers than we did some 35 years ago even after indexing. A pre-retirement estimate doesn’t consider retirement before collecting benefits. Basically the projection is optimistic before we retire by calculating that we will continue earning the higher later life earnings rate until our Social Security filing date. All those projected higher earnings years then override older lower earnings years. It actually says: *Retirement    You have earned enough credits to qualify for benefits. At your current earnings rate, if you continue working until…

When I looked back 35 years from my early retirement year to 1975, my part-time earnings was $1002 that year. If I had $0 earnings going forward then that 1975 earnings would be counted as part of my 35 years for my AIME, not the last year’s reported earnings projection. Even when indexed that 1975 earnings amount should drag the Social Security estimate down once Social Security is calculated going to $0 income projected forward. I did accept that my actual Social Security benefit would be lower than what I looked at and used in my retirement planning before pulling the early retirement trigger. I just didn’t know how much.

High Income Earners

None of this may matter to anyone having 35 years of earnings above the Social Security earnings cap. The cap for maximum taxable earnings for recent years are –

  • 2019 $132,900
  • 2018  $128,400
  • 2017 $127,200
  • 2016 & 2015 $118,500
  • 2014 $117,000
  • 2013 $113,700
  • 2012 $110,100

If you have 35 years of high earnings that surpasses the Social Security earnings cap, then you qualify for the maximum Social Security payment amount. For 2019 that is $2,861 a month at full retirement age.

How My Social Security Estimate with Zero Earnings Going Forward Turned Out

My Social Security estimate at age 51 when I retired early with 35 years employment earnings.

My estimate includes 2 years working part-time when I was in high school within my 35 year earnings history. But those and other lower earning years of my youth wouldn’t matter. There is a high projected forward earnings based on the last year of my career in the calculation for another 11 to 19 years (depending on benefit filing age) into the future used to get the displayed benefit payment amounts.

*Retirement    You have earned enough credits to qualify for benefits. At your current earnings rate, if you continue working until…

your full retirement age (66 and 8 months), your payment would be about- $ 2,417 a month

age 70, your payment would be about……………………………………. $ 3,113 a month

age 62, your payment would be about……………………………………. $ 1,687 a month

Your estimated taxable earnings per year after 2010……….  $106,800

As of now I have a total of 42 years of social security recorded earnings because of some sweet retirement gigs. I did things I wanted to do and learn to do for only as long as I wanted to do it. The 7 years of retirement gig’s yearly earnings ranged from a low of $668 to the high of $107K. My best guess is that 4, maybe 5 of my retirement gig year’s earnings ended up higher than earlier indexed earnings years. That obviously should improve my Social Security calculated amount once $0 earnings (NONE) is used in the calculation going forward and my benefit is calculated solely on my highest 35 years earnings history.

Here is a comparative view of some of my early retirement Social Security estimates. It includes the projected earnings listed as part of the estimate calculation.
You have earned enough credits to qualify for benefits. At your current earnings rate, if you continue working until… your full retirement age (66 and 8 months), your payment would be about age 70, your payment would be about age 62, your payment would be about
Your estimated taxable earnings per year after 2010…..$106,800 $2,417 a month $ 3,113 a month $ 1,687 a month
Your estimated taxable earnings per year after 2015……$66,918 $ 2,423 a month $ 3,069 a month $ 1,746 a month
Your estimated taxable earnings per year after 2016……$40,438 $ 2,474 a month $ 3,134 a month $ 1,783 a month
Your estimated taxable earnings per year after 2018……$668 $ 2,589 a month $ 3,279 a month $ 1,866 a month
Your estimated taxable earnings per year after 2019……NONE $ 2,678 a month $ 3,392 a month $ 1,930 a month
I found it interesting when comparing Social Security estimates and reviewing my lifetime of earnings

Of my total 42 years of working and paying into Social Security I had 11 years that paid out high bonuses which allowed me to hit the Social Security earnings cap. I do remember having a few Decembers in my first career when I got a take home pay bump because Social Security wasn’t withheld from my check until the new year. Also included are 13 earlier years where I worked 2 jobs so my wife could care for our kids. Childcare was too expensive even in the 80s so we did what we needed to do. Working 12 hour days boosted my income those years so we could make ends meet and later pay off debt. That helped increase my AIME during those years although it added zero earnings years for my wife’s Social Security AIME calculations.

When I retired early I used the FRA amount of my Social Security estimate in my retirement calculations.

Since I wasn’t retiring with a million in the bank I needed to make sure I could fund my early retirement the way I wanted to. I believed that my Social Security may end up a couple of hundred dollars less once it’s recalculated with $0 earnings going forward. I was OK with that and started my new retire early and often life. But between inflation adjustments and the way Social Security PIA bend points favor lower earning segments, I now find that my FRA benefit amount is a couple of hundred dollars higher. Understanding of course it isn’t apples vs apples. One estimate is presented in 2010 dollars and the latest in 2019 dollars.

Inflation aside, one might think it should be higher since I worked some awesome retirement gigs that replaced some low earning years of my youth. However, that Social Security estimate I pulled way-back-when before I retired projected high forward earnings right up to my benefit filing date, not NONE as it is now. Those old future optimistic earnings figures Social Security used would also override old lesser earning years in the estimate. It would override much more of them than my few years of retirement gigs and a future earnings of NONE going forward to my benefit filing date. Those retirement gigs probably do help with the new estimate but doesn’t fully explain the numbers now being provided.  

What can I say about the impact to my Social Security estimate with zero earnings projected forward —

Hard to completely figure it out without having the full wage indexing factors they used against the small earnings of years-past to calculate my AIME. I can say that the latest Social Security estimate with NONE earnings going forward is better than I was expecting. If we have 35 years of work earnings paid into Social Security before we retire early, that pre-retirement Social Security estimate we pull and run through the retirement calculator might be a lot closer to our benefit amount than we think it will be. Both because there will be no zero earnings years calculated in our AIME and there being a shorter amount of years to our benefit filing date used in the earnings forward calculation.

Anyone who pulls off early retirement in their 30s or 40s with less than 35 years paid into Social Security may find a different result. Especially since there will be a longer calculation to age 62 or older projected forward with their current earnings amount. A more accurate Social Security estimate may only happen after a year or two of lower earnings or NONE. When deciding to retire early, running your numbers with a reduced anticipated future Social Security payment amount should be considered.

I always believed a lower Social Security benefit was a good trade for early retirement and still do.

Social Security may or may not live up to the estimates they give us. I believe that since we are required to pay into it our entire working lives that it will meet its obligations, although possibly reduced. So much can happen with the markets and Social Security but we plan with the data we have. The future is unknown, so we should always add a little worst case scenario planning, just in case.