What’s Your Early Retirement Plan?

Are you one of the millions of Americans who wants to retire early? A recent study from MSN found that two-thirds of millennials want to retire before age 65.1 That’s well before Social Security’s full retirement age of 67. While early retirement may be a desirable goal, it can also be a challenging one.

Early retirees face a number of difficult obstacles. They spend more time in retirement, which means they have to fund more years with distributions from their savings. If they retire before they’re eligible for Social Security or Medicare, they’ll become even more reliant on personal savings and investments.

Even with these challenges, though, you can retire early if you stick to your plan. Below are a few questions to ask yourself as you get started. You may also want to work with a financial professional to help you analyze your needs and goals and develop a more detailed plan.

 

What’s your funding need?

Every good plan has to start with a goal or desired outcome. In your retirement plan, your goal should be your funding need or retirement number. That’s the amount of money you need to save to fund your retirement.

It may be difficult to predict how much money you’ll need in retirement. That’s especially true if retirement is decades away. However, you can use your current expenses as a starting point to estimate your living expenses in retirement. Consider how your life may be different in retirement. Perhaps you’ll downsize to a more affordable home, or maybe you’ll have lower debt payments. Also, be sure to factor inflation into your estimate.

Once you have a spending estimate, think about how many years you may live in retirement. It’s possible that you could live into your 80s or even 90s. If you retire early, that means you could live in retirement for 30 or 40 years. Multiply your spending estimate by your number of years in retirement, and you’ll get a ballpark figure of how much money you may need to fund your lifestyle.

 

How much do you need to save each month to hit your target?

Fortunately, you won’t be entirely dependent on savings in retirement. You will likely have other sources of income, like Social Security or a pension. You may also receive rental income, investment income or other cash flow. Subtract that income from your funding need. The difference is the amount you’ll need to withdraw from savings every year in retirement.

You can then work backward to estimate how much you’ll need to save each year to hit your target. Set up automatic contributions to your retirement accounts so you can stay on track. Also, be sure to implement an investment strategy that minimizes risk but also offers growth potential.

Your financial professional can help you develop these estimates. They can identify risks and possible expenses that you haven’t considered. And they can help you implement an investment strategy that’s aligned with your goals and risk tolerance.

 

Do you need to make changes to your retirement plans?

It’s possible that even if you maximize your savings, you’ll still fall short of your goal. This shortfall is known as a savings gap. If you can’t save enough to overcome this gap, you may need to make changes to your plans. For instance, you could push back your planned retirement date to help you save more money. Or you could consider part-time or seasonal work in retirement.

You could also scale back your planned spending in retirement. You could move to a more affordable location or downsize to a smaller home. You could also travel less and eat at home more often. Go back to your retirement spending estimate and look for areas where you can make cuts.

Ready to develop your early retirement strategy? Let’s talk about. Contact us at Peak Financial. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.

 

1http://www.businessinsider.com/millennials-not-saving-enough-to-retire-early-2017-6

 

Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.

17596 - 2018/4/19

New Surveys Find Baby Boomers Are Unprepared for Retirement

According to a pair of recent surveys, baby boomers aren’t quite ready for retirement. A Gallup study found that more than half of Americans are worried they won’t have enough money for retirement.1 A separate study from the Insured Retirement Institute showed that 42 percent of baby boomers have no retirement savings, and of those who do, 38 percent have less than $100,000.2

If you’re a baby boomer who’s behind on retirement savings, you’re not alone. Many others are in the same position. Unfortunately, the longer you wait to take action, the fewer options you may have available. Time is your strongest asset, so it pays to take action early. Below are three tips to help you do just that. You may also want to consult with a financial professional to help you develop a customized plan.

 

Maximize qualified account contributions.

Qualified plans such as 401(k) accounts and IRAs are popular savings vehicles, primarily because of their tax treatment. These accounts are tax-deferred, which means you don’t pay taxes on growth as long as the funds stay in the account. Tax deferral may help you accumulate assets faster than you would in a taxable account. Additionally, your 401(k) may offer matching employer contributions, which could provide additional savings.

Look at your budget and find ways to increase your contributions. If possible, try to contribute the maximum amount. In 2018 you can contribute as much as $18,500 to a 401(k) and up to $6,000 to an IRA. If you’re age 50 or older, however, you can make something called catch-up contributions. These are additional contribution amounts above and beyond the normal limits. You can contribute an additional $5,500 to a 401(k) and $1,000 to an IRA.3

 

Consider using an annuity to increase your guaranteed* income.

Longevity is a difficult challenge in retirement. People are living longer, so it’s important to plan for a long retirement. However, it’s impossible to predict just how long you will live. A 65-year-old couple today has a 73 percent chance that one will live to age 90 and a 47 percent chance that one will live to 95.2 That means it’s possible your retirement could span several decades.

You can reduce the longevity risk by creating guaranteed lifetime income. Social Security and pensions are traditional sources of retirement income that’s guaranteed for life. However, annuities can serve as another source. You can use annuities to create lifetime income in a variety of ways. A financial professional can help you determine whether an annuity is right for your needs and goals.

 

Consider changes to your retirement plans.

Finally, if you’re saving as much as possible but still feel you’re off track, it may be time to re-evaluate your retirement plans. Some simple changes could reduce your funding need and eliminate your savings deficit. For example, you may want to consider working a few extra years to give yourself an opportunity to save more money. Or you could downsize to a smaller home to minimize your living expenses.

Also, don’t ignore the idea of working in retirement. Many retirees find that they have too much time on their hands. Even a part-time or seasonal job can help you fill your empty schedule and give you a stream of income so you can reduce withdrawals from your savings.

Ready to get your retirement back on track? Let’s talk about it. Contact us at Peak Financial. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.

 

*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
 

1http://news.gallup.com/poll/210890/americans-financial-anxieties-ease-2017.aspx

2https://www.planadviser.com/baby-boomers-not-enough-prepare-retirement/

3http://time.com/money/4990121/401k-ira-contribution-limits-2018/

 

Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.

17597 - 2018/4/19

Is the 4-Percent Withdrawal Rule Right for You?

If you’re like most retirees, you’ve spent much of your career accumulating assets to fund your retirement. You’ll likely rely on those assets to generate a portion of your retirement income. While you will probably have Social Security income and possibly even a pension, you may also need income from your savings.

Even if you’ve saved a substantial amount for retirement, it can be difficult to know how much to withdraw each year. If you take too much, you could deplete your savings and put yourself in a challenging financial situation later in life. Take too little, and you may struggle to cover your living expenses.

A popular strategy is to take four percent of your savings balance each year as a retirement distribution. The idea behind this recommendation is that four percent is a modest amount that will allow your savings to continue growing. It’s also a simple approach that makes it easy to plan your distributions.

This approach isn’t right for everyone, though. There are several reasons why the “four percent rule” may not be an effective approach. Below are a few areas in which this method may fall short:

 

Inflation and Market Volatility

In theory, the four percent withdrawal is supposed to change every year. You look at your account value annually or even more often, and then you adjust your withdrawal to reflect the new balance.

In practice, many retirees fail to make this adjustment, which results in a constant withdrawal amount that stays flat over time. This is problematic because it doesn’t account for inflation. As your cost of living increases, so too should your withdrawals. Otherwise, you may not be able to afford your lifestyle over time.

Another issue with a flat withdrawal is what happens during a market downturn. If you don’t adjust your withdrawal to reflect a lower balance, you could end up withdrawing much more than four percent. If that continues over time, you may deplete your account and limit your opportunities for growth.

 

Asset Allocation

Another issue with the four percent approach is that it doesn’t account for your specific asset allocation. A four percent withdrawal may or may not be modest, depending on your investment strategy. If you have a very conservative approach with little upside potential, a four percent annual distribution may deplete your account over time.

It’s impossible to prescribe an optimal withdrawal rate without knowing how the funds are invested. Your withdrawal amount should be based on your specific needs, goals and objectives, and it should be aligned with your allocation and investment strategy.

 

Spending Requirements

Finally, one of the biggest issues with the four percent approach is that it isn’t specific to your spending needs. Your plans for retirement are unique to your goals and objectives. Your income strategy should be unique, too.

You may want to spend money in the early years as you travel and pursue favorite hobbies, then cut back on your spending as you get older. Or maybe you want to be conservative early in retirement so you have assets to cover health care or long-term care later in life. Maybe you want to minimize your spending so you can leave a significant legacy for your loved ones.

There could be any number of factors and criteria that influence your income needs. A better approach may be to build a budget that includes your specific spending goals and your projected retirement income. Then you can determine exactly how much income you should take from your savings each year.

Ready to develop your retirement distribution strategy? Contact us at Peak Financial Corp. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.

 

Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.

17378 - 2018/2/13

3 Tips to Minimize Your Taxes in Retirement

It’s tax time. Many retirees assume that their tax exposure will go down once they leave the working world. After all, they’ll no longer have income from a job. Even without a job, though, many retirees still face tax exposure. Many common sources of retirement income, such as Social Security, pensions and qualified account distributions, are taxable.

If you are recently retired or approaching retirement and haven’t budgeted for taxes, you could be in for a surprise. Your tax exposure could reduce your discretionary income and limit your ability to live the retirement of your dreams.

The good news is there are steps you can take today to minimize your tax exposure in retirement. Below are three such steps. You also may want to consult with a financial professional to develop action steps that are aligned with your specific needs and goals.

 

Maximize your contributions to a health savings account (HSA).

Health care is often a substantial cost item for retirees. In a recent analysis, Fidelity found that the average retired couple is likely to pay $275,000 for health care expenses in retirement.1 That includes costs such as premiums, deductibles, copays and more. If you take income from your IRA or 401(k) to pay for those costs, you could inflate your taxable income.

Instead, consider using a health savings account (HSA) to pay for those costs. With an HSA, you can make tax-deductible contributions, grow your funds tax-deferred and then take tax-free distributions to pay for qualified health care expenses. That could reduce the amount of taxable withdrawals you have to take from other accounts.

In 2018 you can contribute up to $3,450 to an HSA as an individual or $6,900 as a family. If you’re age 55 or older, you can make an additional $1,000 catch-up contribution.2 Consider maximizing your HSA contributions so you can take advantage of tax-free distributions in retirement.

 

Consider converting your traditional IRA to a Roth.

Qualified accounts like IRAs and 401(k) plans are popular because of their favorable tax treatment. They’re usually funded with pretax dollars. With a traditional IRA you can take a tax deduction for your contributions, assuming you meet income limitations. Your 401(k) contributions are deducted from your check on a pretax basis, thus reducing your taxable income.

These accounts also offer tax-deferred growth. You don’t pay taxes on growth as long as the funds stay inside the account. By the time you reach retirement, it’s possible your entire IRA or 401(k) could be funded with dollars that have never been taxed.

You can’t delay taxes on these funds forever. The IRS treats distributions from traditional IRAs and 401(k) plans as taxable income. That could be problematic in retirement if you’ve used a traditional IRA or 401(k) to accumulate most of your retirement assets.

You could consider a Roth conversion to minimize the tax burden. As the name suggests, you convert a portion of your traditional IRA funds into a Roth account. You pay taxes on the converted amount, but you won’t pay taxes on future growth or distributions, assuming you wait until age 59½ and until the Roth has been open at least five years before you take a withdrawal. A conversion may create a tax liability today, but it could also eliminate tax exposure in the future.

 

Donate your RMDs to charity.

Traditional IRAs and 401(k) plans are popular in part because they allow you to defer your taxes on investment growth. However, you can’t defer those taxes forever. The IRS requires you to take minimum distributions at age 70½. These required minimum distributions (RMDs) are treated as taxable income.

If you’d already planned on giving money to charity, however, you could take advantage of a unique exception to reduce your taxable income. The IRS allows you to donate your RMDs to charity and avoid paying taxes on the distribution. To do so, you’ll have to set up the distribution to transfer directly to the charity without passing through your account first.

Ready to develop your retirement tax strategy? Let’s talk about it. Contact us at Peak Financial Corp. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.

 

1https://www.fidelity.com/viewpoints/retirement/retiree-health-costs-rise

2https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-sets-2018-hsa-contribution-limits.aspx

 

Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.

17377 - 2018/2/13

What’s Your Plan to Fund Retirement Healthcare Costs?

What’s Your Plan to Fund Retirement Healthcare Costs?

You also may want to use this time to consider your health and how you may pay for medical needs after you stop working. Many retirees assume that Medicare will cover their health care expenses. While Medicare is a helpful program, it doesn’t cover everything.

Required Minimum Distributions: How Do They Differ Between IRAs and 401(k) Plans?

Required Minimum Distributions: How Do They Differ Between IRAs and 401(k) Plans?

Both types of accounts are qualified. That means you don’t pay taxes on growth as long as the funds stay inside the account. Both also offer tax-favored contributions. Your 401(k) contributions are deducted from your paycheck pre-tax, effectively reducing your taxable income.