HOW CAN I RETIRE EARLY

A lot of people have asked me to explain how the debt ceiling works.
This infographic does a good job of that.

A 401(k) is a type of account that, if understood and utilized properly, could help you meet your retirement goals.   Though there are many types of 401(k) plans out there including Simple, Safe Harbor, and the Individual 401(k)s, we will cover here the more popular Traditional and Roth 401(k)s.

Basically, a 401(k) is an employer sponsored plan in which employees are allowed to save for their retirement.  It is a type of Defined Contribution (DC) plan which is different from traditional pensions which are known as Defined Benefit (DB) plans.

Under a pension (which is a DB Plan), a retired person generally receives a specified monthly amount that is calculated based on his earnings history, years of employment, and age.  Since the monthly benefit payments generally continue regardless of the performance of the underlying investments, the employer essentially bears the risk of having to contribute more money into the DB plan to meet future payment obligations.  In short, the employer bears the investment risk.

Under a 401(k) (which is a DC plan), the amount that the employee and employer contribute annually is generally specified in advance.  For example, for 2011, an employee can contribute 100% of their earned income up to an amount not to exceed $16,500.  If the employee is over age 50, they can contribute an additional $5,500 which is called a catch up provision.  Employees can also increase, decrease, or stop their contributions during the year within certain limits.

Employers, on the other hand, are generally not required to, but can make matching contributions to an employee’s 401(k) account.  While employees are immediately 100% vested in their personal contributions (they are 100% owned by the employee), employers generally specify a vesting schedule which determines what percentage of the employer contributions get vested over the number of years of service.

You will note that for 401(k) plans, employer and employee contributions to the account are predetermined (though subject to change), but future benefits are not.  In fact, the future benefits you receive from your 401(k) plan would be determined in large part by how much you contribute and how your investments perform over time.  So, you bear the investment risk.

Contributions made into 401(k) accounts are traditionally made with pre-tax dollars which means that such contributions reduced a person’s taxable income for the year they were made.  With the advent of Roth 401(k)s in 2006, contributions can now be made on an after-tax basis.

Whether the contributions are pre-tax or after-tax, the investment amount grows on a tax-deferred basis.  This means that no taxes are paid on dividends and capital gains while they remain in the account.  Employees are usually allowed to take loans against their 401(k) plans, though this should generally be looked at as a last resort.  Loans that are not paid back, as when someone is terminated and can’t pay back the loan, may be subject to taxes and early withdrawal penalties.  Upon leaving a company, the employee can rollover their 401(k) into another 401(k) plan, though it is usually better to rollover into an Individual Retirement Account (IRA) as you generally will have more flexibility.

Upon retirement, taxes will have to be paid on withdrawals made from traditional 401(k) plans, while no taxes would be due on withdrawals made from Roth 401(k) plans.  An early withdrawal penalty of 10% may be assessed if withdrawals are taken out prior to reaching age 59 ½.  There are certain exceptions under which this 10% penalty may be waived, such as in the case of death, permanent disability, if you take out substantially equal monthly distributions, or for certain hardship withdrawals.  For traditional 401(k)s, required minimum distributions (RMD) have to be taken out once someone reaches age 70 1/2 to avoid a penalty.  There is no such RMD requirement for a Roth 401(k).

Over the last three decades, 401(k) plans have become a lot more popular as companies favored this type of DC plan over traditional pensions or DB plans.  Unfortunately, this also means that employees now have to invest more and be more proactive in managing their 401(k) plans to ensure that they have enough personal savings to see them through retirement.

The good news is that 401(k)s are still a great way to save for your retirement for several reasons:  the tax deferral features, the employer matching contributions (if available), the investment choices available, and the relatively large annual contributions that can be made when compared to the $5,000 annual and $1,000 catch up contribution limits for Traditional and Roth IRAs.  All these allow for the ability to accumulate a significantly large sum that you could use for a very comfortable retirement.

Most Americans are aware that the US government owes a lot of money – over $14 Trillion and counting – and that the US Budget Deficit is expected to reach a record high this year – about $1.5 Trillion.  Unfortunately, many Americans have not heard of another deficit that threatens the future quality of life, standard of living, peace of mind, and dignity of almost every future retiree out there as well as their extended family:  the $6.6 Trillion Retirement Income Deficit.

The above figure comes from a recent study commissioned by Retirement USA and conducted by the respected non-partisan Center for Retirement Research at Boston College.  In its simplest terms, the Retirement Income Deficit is defined as the difference “between the pensions and retirement savings that American households have today and what they should have today to maintain their standard of living.”

This is certainly grim news for most Americans, and though the amount of the deficit seems astronomical, the actual deficit may actually be higher than estimated for several reasons.  One reason is that the estimate assumes people will continue to work, save, and accumulate additional pension and Social Security benefits until they retire at age 65.  With many people retiring well before they turn 65, the amount of retirement savings they would actually accumulate would be less than the figure assumed in the study.  This means that the income shortfall would be higher than estimated.

Another assumption the study makes is that retirees will spend down all their wealth in retirement, including all of the equity they have in their homes.  In reality, not everyone will convert their entire savings into annuities, nor would everyone enter into a reverse mortgage in order to annuitize their equity in their homes.  Consequently, the income shortfall would be greater than estimated.  Other expenditures not figured into the study are potential out of pocket medical and long term care expenses that retirees may incur as they age.  Last year, it was estimated that the cost of a private room nursing home was over $70,000 a year.  These, no doubt, would compound the income shortfall.

Even if the Retirement Income Deficit were only $6.6 Trillion, it is hard to see, and unrealistic to expect that government would make up for this deficit in its entirety by increasing social security benefits.   Already, the government has announced that the Social Security Administration would incur a deficit of $45 Billion this year, with the total reaching $600 Billion over the next 10 years.  Consequently, congress is already exploring making changes to our social security system such as raising taxes, reducing benefits, or both.

It is also difficult to imagine that the corporate sector would come to our rescue.  Do you think that corporations would change course and start providing more traditional pensions or defined benefit plans?  Alternatively, would they suddenly feel more altruistic and increase their matching contributions to 401(k)s or other defined contribution plans?

At the end of the day, this burden of this $6.6 Trillion Retirement Income Deficit will fall squarely upon the shoulders of every future retiree out there, and to some extent, their extended family. Future retirees would either have to retire with a much lower quality of life and standard of living than they had previously imagined, continue to work either part time or full time into their retirement years to support themselves, or have to significantly increase their current retirement savings in order to ensure that they can still retire with the kind of lifestyle they would like to have.

This is a new reality.  And if we are aware of it, accept it, and act on it by assuming responsibility for our own retirement, there is every reason to believe that we will be able to have the financial peace of mind we all deserve during our golden years.

Identity theft continues to be a growing threat to our finances, credit scores, and peace of mind. With a lot of banks and credit card companies now promoting the use of RFID cards, the ability to steal one’s credit information has become even easier. I, for one, do not use nor would I recommend using RFID cards. Why would you use one – just so you wouldn’t have to swipe your card on the reader when you make a purchase? I don’t think the risk that comes from using these cards is worth the convenience of saving the 1 or 2 seconds it takes to swipe your old card through.

I hope you’ll agree after watching the video below.

There is an old saying that goes “Hope for the best, but prepare for the worst.”  Unfortunately, when it comes to our personal finances, most people just hope for the best, but they forget to prepare for the worst.  This is where a lot of people get into trouble.

How exactly to people hope for the best.  Well, for example, people might say to themselves:  I have good job now; I make good money now; I will get that raise next year; I will get that next promotion; I will always have a job; I can buy this with my credit card as I will have more money later; and so on.  If all these statements were true, then one should never worry about their future finances or retirement.  One could always spend as much as he or she wanted, knowing full well that all will be well in the future.  Or will it?

Let’s take a look at the second half of the saying – prepare for the worst.  How can one do this?  Well, at the very least, one can ask him/herself questions such as:  What if I don’t get that increase?  What if I don’t get that promotion?  What if our company gets into trouble?  What if I lose my job?  What if I can’t find another job quickly or at all?  I would like to buy this, but what if I don’t have enough money to pay my credit cards?  What if I can’t pay the rent or the mortgage?

Now, please understand that I am by no means advocating that we adopt a negative outlook on our finances and on life in general.  Quite the opposite, I believe we should all stay positive.  However, what I am saying is that we should all temper or balance our desires on the one hand to spend money on more and more material things, with a thoughtful consideration on the other hand of:  What if I don’t have enough money?  Or can I really afford this?  Or do I really need this?

The following video of Suze Orman called “Can You Afford Your Life?” talks more about this issue and hits the nail on the head.  Take a look.

It is a universal dream that we all want to be able to stop working someday and retire. With today’s economy and uncertainty, it is harder than ever to plan for the future taking all things into consideration. Just when you are looking comfortable and ready to retire, unexpected medical expenses can cause you to dip into your retirement savings. On top of that the taxes on your retirement withdrawals keep going up.

Typically, life events can delay or derail your plan for retirement. Unfortunately, rising costs are a concern to every investor and they need to be taken into consideration in ones retirement planning.

One of the most concerning issues is the rising cost of health care costs for everyone. This threat becomes even larger in the later years when health issues are more likely to arise. Most people think that they can rely on Medicare, but Medicare only covers a percentage of medical bills and prescriptions. Therefore, your out-of-pocket expenses are most likely going to be large and growing in retirement.

According to a 2010 study conducted by the Center for Retirement Research at Boston College, a couple retiring today at the age of 65 will need an estimated $197,000 in saving to pay for their lifetime of health care expenses. This number rises to $260,000 if you include nursing home costs.

In addition to rising health care cost, there is the impact of taxes and inflation on retirees living on a fixed income. The cost of living for life’s basic necessities such as; food, housing, utilities, is likely to rise. Inflation can turn these basic necessities into a luxury for some. Inflation affects someone living on a fixed income rather than someone still in the workforce, because wages usually rise as consumer prices rise making inflation not so much a concern. But, on a fixed income, inflation poses a significant risk, which most people underestimate.

When retirement planning, one must take into consideration the impact of rising costs of health care costs, taxes, and inflation. This is the time to turn to a retirement plan that can guarantee your retirement income will grow and last a lifetime. For more information go to: http://www.financialplannertemecula.com

Article Source: http://EzineArticles.com/?expert=Morgan_Meinhardt

Comments:  Health care costs have been rising by about 7% each year which is way above the inflation rate.  Consequently, future medical expenses will continue to be a large drag on most people’s ability to retire early with the type of lifestyle they’d like to have.  This article sheds more light on this issue.  Future entries to this blog will discuss ways to address or minimize this risk.

Article Source: http://EzineArticles.com/?expert=Jeanette_Joy_Fisher

Comment:  Having a high or good FICO score could save you thousands or even tens of thousands of dollars over your lifetime.  With that in mind, it is important to make sure that you keep your FICO score as high as possible.  The above article will give you a great basic understanding of what comprises your FICO score, and will help you manage your overall credit picture going forward.

We’ve just been through a tough couple of years, not to mention a tough decade, especially in financial terms.  With the New Year upon us, many people are now looking to make some New Year’s Resolutions as far as their finances are concerned.  Below are some tips that I know would help you out in this regard, and hopefully lead you to a more Prosperous New Year!

1.  Decide That You Will Be Better Off Financially. You have to win the money game in your head first, before you can win it in the physical world.  To do this, evaluate your attitudes about money, success, rich people, and prosperity, to name a few.  Do you associate positive thoughts and emotions to these, or are they negative.  If they are negative, you need to work on and change these.  You see, money is neutral, and it can be used for good or evil in the hands of the right or wrong person.  Work hard on changing your attitudes and internal dialogue concerning money, success, etc. as it will be difficult for you to come into more money or become rich and prosperous if you have negative thoughts about these.

2.  Write Down Your Goals on Paper. Writing down your goals automatically increases your chances of achieving them.  Also, stretch your goals but also make them realistic.  For example, if you have saved up $20,000 to date, having a goal of increasing this to $22,000 in a year may not be a stretch.  On the other hand, setting a goal of increasing your savings to $500,000 may not be realistic.  Also, be specific about your goals.  How much do you want to save short-term, medium-term, and long-term?  And, when do you want to achieve these by?

3.  Resolve to Cut Down on Your Expenses. In order to do this, you will need to tally all your expenses.  Start off by jotting down all your bills and expenses for a month.  Don’t forget to write down the amounts you spend on coffee in the morning, lunch at work, take out dinners, etc.  As you do this, two things will happen.  First, you will realize and be surprised by how much you are actually spending on certain things.  Second, you will be able to categorize the necessary or “have to” expenses from the discretionary or “want to” expenses.  Armed with this information, you should be able to cut down or trim certain expenses, and add whatever you save to your savings program.  Just remember, don’t cut all the discretionary expenses off as you still want to be able to enjoy yourself during the year.

4.  Pay Off Your Credit Cards. Credit cards offer many conveniences – such as being able to purchase large-ticket items that you pay off over time, and eliminating or at least minimizing the need to carry a lot of cash.  A lot of people, however, find themselves carrying huge credit card balances from month to month, and/or paying close to or only the minimum amount due each month.  If you are in this boat as well, resolve to pay down your credit card debts as quickly as possible, and resist the temptation to continue to add to your credit card balances.

5.  Build an Emergency Fund. It is always a good idea to have an emergency fund saved up.  This could be used for different reasons such as for emergency expenditures around the house (e.g. the hot water heater goes), or even to pay for that discretionary item you just want to have.  Tapping part of your emergency fund for this purpose may be better than running up your credit card balance as you would avoid having to pay any interest that may be due later.  Of course, one of the more important uses of an emergency fund is to cover your expenses in the event that you are temporarily out of work.  Since job transitions tend to be a lot longer now than they used to be, I would recommend that you consider a 6-12 month emergency fund instead of a 3-6 month fund.  That means that you should have enough money saved in order to survive in case you find yourself out of work for 6 to 12 months.

6.  Maximize Your Savings Program. Social Security is not designed to be the end-all and be-all of your retirement program.  Unfortunately, neither are company pensions which have been on a steady decline since 401(k) plans were introduced after the Revenue Act of 1978.  As a result, more and more of our retirement will have to fall upon our shoulders in the form of personal savings and on-going income.

With regards to personal savings, what you are able to save up by the time you want to retire is affected by three factors:  (a) the Time you stay invested in the market; (b) the Rate of Return you get on your savings or investment; and, (c) the Amount of Money you invest.  Getting into detail here is beyond the scope of this article, but for now, remember that you maximize Time by starting to save/invest as soon as possible.  You maximize Rate of Return by saving not just in CDs, but by considering investing in mutual funds, for example.  Finally, you maximize the Amount of Money you save by cutting down your expenses and placing a priority on your Savings and Investment Program.

7.  Explore Other Income Opportunities. With regards to on-going income, you will see more and more people look to this in the years ahead in order for them to supplement their retirement income, and so they could maintain their desired lifestyles through their longer life expectancies.  So, start exploring other income generating opportunities outside your current job.  Since there is no longer such as thing as a guaranteed job, the sooner you start this the better.  Starting now would give you more time to brush up on or add new skills, learn a new trade or business, and/or build your business.  Lastly, whatever you earn from this on the side will definitely add to your Savings and Investment Program.

8.  Take Care of Other Financial Matters. If there are certain other matters you have not taken care of to date, do this.  Take care of your life insurance, your auto insurance, college savings for the kids, your will, etc.  Don’t put these matters off anymore.

9.  Set Goals for Other Areas in Your Life. It is beyond the scope of this article to delve into detail here, but I would suggest that you also set specific goals in other areas of your life such as Personal, Professional, Spiritual, Health, Social, and Intellectual.  A chain is only as strong as its weakest link.  So, resolve to strengthen and improve all areas of your life in order for you to reap a truly prosperous and fulfilling life.

10.  Reaffirm That You Will Succeed Every Day. We live in a world where we are constantly bombarded by negative news.  Don’t let this sway you or distract you.  Remember that the financial resolutions you have made and committed to achieving will not materialize overnight.  You will see the results over months, if not years to come.  Therefore, it is very important to continue to read out your written goals to yourself twice a day (morning and evening) and reaffirm to yourself that “you will succeed”.  Doing this will help you drown out the negativity around you with your positive mind, and will lead you to a more Prosperous You!

Putting together a written budget is very important if you want to be able to get a handle on your money, and actually save money. Writing down you budget is like having written goals. You see, if you don’t have written goals that we are committed to achieving, we will most likely achieve them.

Also, the average person will, over his or her lifetime, probably work 80,000 to 100,000+ hours. Also during that lifetime, the average person will earn anywhere from $1,000,000 to $4,000,000. The question is, how much time will the average person spend budgeting his finances and planning for his retirement. If you are serious about retiring early, commit to a written budget.

Check out this video from Dave Ramsey.