June 17, 2014

2 Much Cents Update

I’m sure my longtime and faithful readers are now accustomed to my periodic “Lightning Rounds,” but let me take a moment to back up for newer readers.

The Lightning Round is designed to be an interactive dialogue where I ask you to submit any personal finance questions you may have. Also, if there are any financial topics or news stories that you’d like to know a little more about, please submit those as well. I hope you know by now that I'm always willing to try to answer any questions you may have, but between now and midnight, June 22nd, I will be accepting questions for the Lightning Round: Take 3. I promise that I will eventually answer every single question; however, I will answer the first five topics that I receive publicly as my next post!

If you’re fine with me using your first name and you want to be a part of a 2MuchCents post, go ahead and submit your question ASAP. If you’d prefer to be listed as “anonymous,” or if you would prefer I just get back to you privately, just say the word, and I’ll be happy to oblige. Please feel free to reach out to me via Facebook, email, LinkedIn, my cell, or by posting a question or comment directly on this post.

For 113 posts now, I’ve tried to write about what I think you may find interesting and helpful. However, I feel like The Lightning Round gives me a chance to zero in on what topics and questions you specifically have, and hopefully, lets me “scratch an itch” for you. The inaugural Lighting Round and the Lightning Round: Take 2 seemed to go pretty well, and you know what they say, the third time's the charm!

2MuchCents is continuing to roll right along and now has more than 20,000 unique views! Please continue to read and please continue to share my posts with anyone and everyone who you think could benefit. The phone lines are now open, and I’m taking requests!


June 13, 2014

Why You Might Not Want to Retire Early

Credit: James Barker
I’ve spent the last several weeks sharing some advice for you to consider if you want to retire early. So why in the world would I wrap up The How to Retire Early Series with a post about why you might not want to? It’s because there is certainly more to life than finances!

Most people work to provide a shelter over their head and clothes on their back. Some people hate their job, but they go to work every day anyway to make ends meet and for their family’s well-being. Some people tolerate their job, but they are ready to quit just as soon as they are confident that they are financially able to. Other people love their job, and truth be told, they’d be happy to keep doing what they’re doing long after they reach financial independence. I can respect being in all of these positions, but if you love your job, and you still get a lot of fulfillment and satisfaction out of doing your job, why quit? From a financial perspective, the longer you work, the better off you probably are, so why not? From a life perspective, if you love tennis and are still healthy enough to play, I wouldn’t think of telling you to quit. The same holds true for your job.

Related to finding fulfillment in your work is avoiding boredom. The clients I’ve helped financially transition into retirement often equate retirement to jumping off a moving train. I can imagine so. What will you do without all of those emails, voicemails, and staff meetings? Watching daytime television gets old in a hurry, and you can only travel so much, so I think it is important to have an actual plan in place to avoid boredom. Think back to what summer vacation felt like at times as a kid. In retirement, there is no “back to school” date. This is great news to some, and believe it or not, horrible news to others. If you’re afraid you’ll be bored in retirement, start exploring hobbies, social groups, and volunteer opportunities at your convenience while you’re still on the train and before you’re bored.

Before retiring, you should also consider your relationships with your friends and family. If all of your friends are co-workers and the thought of nine to five with your children or spouse is truthfully a little discomforting, you may want to work on the relationship transition before you retire. I can attest that most co-worker friends fade away once you become a few weeks removed from the workday grind. It's nothing personal - just the principle of being out of sight, out of mind. As far as family, I’m not a licensed counselor by any means, but going from seeing your family two days a week and at dinner to all day, every day, seems like it could be a challenge for both parties involved. (Hey. they have to get used to you being around, too!) Between my friends’ parents and the clients I work with, I’ve seen this transition go well, and I’ve seen it go terribly. I’m not suggesting you continue working to have co-worker friends and avoid your family; I am advising you to be cognizant of the relationship transition before you hand in your ID badge and focus on nurturing those relationships now.

If you’re still enjoying your job, but you do want to reduce your stress or workload, can you consult or go to part-time instead of totally retiring? If you’ve had more than enough of your current job, is there something totally different you can do to still earn a little income? Do you have a hobby that you could further embrace such as wood carving or craft making that could generate a little money for you? All of these strategies can help you retire slowly as opposed to all at once. This could help the financial transition, fulfillment transition, boredom transition, and family/friend transition be more gradual as opposed to night and day.

As people continue to live longer and longer, it’s quite possible you could spend more of your life in the retirement phase than you did in the working phase. This means you have to get retirement right, especially if you’re going to retire early.

If you would like to look at where you are now versus where you need to be to live the way you want to live in retirement, I’d be happy to sit down with you. If you have already retired but would like a “second opinion” as to how you’re doing, if you’re going to make it, and if there is anything you can do to enhance your retirement picture, I’d be happy to try to help you as well. In the meantime, I’ve got to get back to work so I can retire early myself! I’ve got a reservation with a beach chair many years from now, and I don’t want to be late!


June 06, 2014

Retirement Cash Flow Strategies

Credit: anankkml
For most people, cash flows in retirement look different from cash flows while working. The difference is a transition that I have helped many clients through. Cash flow strategy is one of the most important parts of planning for retirement, but it can be complicated since cash flows frequently come from different sources, start at different ages, and carry varying tax implications. People who develop a good plan and stick to it can often add stability and peace of mind, take advantage of tax saving opportunities, and even generate more income in retirement. Let’s look at a few areas:
  • Pension Annuity vs. Lump Sum – For retirees who get to choose a pension payment option, this can be one of the most important decisions they ever make. Actuarially speaking, there’s a good chance that your employer is thinking they are offering you the same amount of money whether you elect an annuity or the lump sum, but there are still things to consider. A lump sum offers a surge of money at retirement that can be more easily passed on to your heirs and better protect your purchasing power against inflation if it is properly invested, but a majority of clients I work with seem to find comfort in choosing the annuity option. In most cases, the monthly annuity amount will remain the same until the day you die. This may not help you against inflation, but if you live long enough, it could eventually mean more total money for you. In the meantime, an annuity feels like a paycheck, which is what retirees are used to, and the mental comfort that brings is the main reason I am usually a supporter of a pension annuity election. I also advise most clients to select a “joint and survivor option” if it is available so that a surviving spouse won’t lose their loved one and the benefits of their loved one’s annuity at the same time. This tactic usually costs the spouse whose pension it is a little bit of cash each check, but it can be a tremendous comfort to the other spouse.
  • Required Minimum Distribution Planning – I’ve discussed this before, but age 70 ½ is an important half-birthday! I won’t take you back through all of the details we covered in my post “Required Minimum Distributions,” but I will say that you should factor this into your retirement planning. If things are a little tight on you before you have to start these distributions, or if the distributions are going to put you in a higher tax bracket once they begin, it may make sense to start prudently withdrawing from your retirement accounts before 70 ½. This could save you tax dollars and allow you a steadier lifestyle throughout retirement as opposed to cutting it close in your 60s and rolling in cash in your 70s. It’s just a thought, but one you should consider if you’re over 59 ½ (there could be penalties if you withdraw from retirement accounts before 59 ½).
  • Social Security Strategy – Many people, including me, are concerned about the long-term solvency of the program as we know it going forward, but there are some Social Security strategies you should consider if your retirement cash flows are doing just fine when you turn 62. If you decide to claim Social Security retirement benefits at age 62 (the earliest applicable age), you are deemed to be collecting benefits “early,” and will only receive around 75% of the benefit you would receive at your “full retirement age.” (Currently, full retirement age is usually between age 66 and 67 for most people, but take a look at this chart to find your specific full retirement age.) If you wait until your full retirement age, you can receive 100% of your benefit, but if your retirement cash flow is still doing just fine at your full retirement age, it might be worth waiting until age 70, when you could receive around 132% of your benefit! That’s around 8% growth per year from age 66 to age 70, and that’s not a bad investment return if you ask me! Putting off claiming Social Security could provide you with more money in retirement if you live long enough, but at the same time, you could be shooting yourself in the foot if you end up passing away relatively young. I would suggest you consider your health and family history, and then consider how much Social Security income at age 62 would help before you decide to delay filing. If you do decide to delay, you can always start before your full retirement age or age 70 if you need to with a partially higher amount of benefits, but it’s probably not worth having beanie weenies in your 60s so you can have filet mignon in your 70s.

I hope you’re beginning to see that if you consider your spending and saving now versus later, the importance of starting off strong, your humble abode(s), your health insurance, and your retirement cash flow strategies, that there are many things you can do to put yourself in the position of having a chance to retire early. That being said, I’ve met plenty of people who could retire early but don’t and plenty of people who did retire early and wish they hadn’t. Some even went back to work! The How to Retire Early Series will conclude next week with a look at why you might not want to retire early even if you followed the advice of my previous posts and could. I hope you’ll check it out.