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When you first enter the workforce you have many decisions to make in regards to how you will fund your retirement years.

After years of earning an income, soon-to-be retirees also have some major decisions to make regarding how their retirement funds will be distributed once they are no longer in the workforce.

For individuals who have a pension plan in place, the decision of how they will take their pension is an important one with significant consequences.

Lately, I have met with several clients who are faced with a very important question,

“Should I roll my pension into an IRA or take the lifetime payments?”

See, pension plans can be distributed in one of two ways;

  1. Through regular installment payments received throughout your retirement years or
  2. Through one lump sum payment (which can be rolled into an IRA)

There are benefits and drawbacks to each option, therefore it is important to weigh each option carefully before making your final decision. Here we evaluate the pros and cons whether you should or should not take the lump sum option on your pension.

Control of the Pension Distribution

One of the potential benefits of opting for the lump sum is the additional control you have over pension funds. This can be beneficial in that most pension plans do not account for inflation when establishing what your monthly annuity payment will be in the years to come. When you choose the lump sum option, you have control over your pension funds and can invest them as you see fit, which can result in additional growth throughout your retirement years.

Control is the largest driving force that have led to most of my clients choosing to roll their pension money over. Most recently, I had a client that said, “I’ve worked for the company 31 years on their terms, now I want to take my money on mine.” Could not have said it better myself.

When you roll it over, you decide when you want your money on your terms. If you want a little extra to spoil your grand-kids on a trip to Disney World, you have the power to do it.

Having control does come with its risks.

You have to be careful to not go on a spending spree and run the risk of spending down your retirement too soon. By choosing the annuity method, you have a guaranteed paycheck for the rest of your life and possibly your spouse if your pension plan allows for it. For some that have a harder time managing money, not being able to have access to the principal may be a good thing.

I have had cases where the client opted to take the lump sum option thinking they could control their spending. Alas, they could not and blew through their entire savings in a short amount of time. Now they have little savings and only Social Security to depend on during retirement.

Security of the Pension

Choosing to get your pension in one lump sum payment, eliminates the security of receiving a monthly check for the remainder of your life, however you do know exactly how much money you are getting. Consider for example, if the company funding your pension annuity payments finds themselves in financial trouble, this may result in problems with your pension payments. There is a Federal agency; the Pension Benefit Guaranty Corp) that may make up for companies that file for bankruptcy, however there are limits to how much money you will receive.

As of 2009, the PBGC has insured pensions up to $54,000 for those that retire at the age of 65. If you’re pension is for more than that and your company goes bankrupt, you might be regretting that you hadn’t taken the lump sum.

As I mentioned above, security of having all your money up front can be reassuring, but; if you mismanage it, you can go through it quickly leaving you with no security in retirement. It’s important to do a self assessment of yourself and your spending habits to make sure you don’t make this mistake.

Estate planning: Don’t Forget the Kids

Annuity payments will cease once you and your spouse have departed. By choosing to receive your pension in a lump sum payment, you can plan your estate to include beneficiaries of retirement funds that are unused during the lifetime of you or your spouse.

In essence that means that if you unexpectedly passed away and your spouse wasn’t too far behind you, all the money that you had paid into your pension goes back to the company.

Another Example of When You Don’t Take the Lump Sum

As mentioned in the first point, it can be attractive to have control of your money when you want it. I had a client meeting years ago that with a gentleman who was a state employee. He was nearing retirement, but still had a few years left. In an effort to entice some of the employees to retire early, the state was offering early buyouts to those that would retire immediately. In his case, the offer was in the neighborhood of $180,000.

At the time, he was dealing with credit card debt and some medical bills, so the offer was enticing. I reminded him that he takes the check, that he would be giving up his guaranteed paycheck in retirement. If he worked just a few more years till age 55, he and his wife were guaranteed around $2,500 per month with the pension. Just a quick calculation using simple interest revealed that in about 6 more years would be the break even point for taking the monthly payments.

Otherwise stated, that after 6 years, he was in far better shape taking the lifetime annuity payment for he and his wife. No question. In this case, taking the lump sum was not the right decision.

Should You Choose the Lump Sum?

The decision as to how you will receive your pension is one that should not be taken lightly. There are several factors to consider and the decision you make today will outline your quality of life for your remaining years. The benefits listed here could also be considered drawbacks if handled incorrectly, therefore be certain you are capable of managing your lump sum payment to ensure you will have financial security in the years to come.

If you feel you cannot properly manage your funds or simply don’t want the hassle of dealing with investments and long term planning, annuity payments might be the better option for you and your family. What is beneficial to one family may not be perceived the same for another, so make sure your decision is based on your unique situation and future needs. If you’re still not sure, be sure to meet with a qualified financial planner to asses your needs and see what direction is best for you.

Source: goodfinancialcents.com

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I’ve recently decided to start a new series where I interview people who are doing extraordinary things with their lives. First up, I have JP Livingston, who retired at age 28 with a net worth of $2.25 million. And, her net worth is still increasing!

Of that total, 60% of her net worth came from saving, while 40% came from growing her money through investing. This is why investing your money is so important, and it’s how you really allow your money to grow for you!

JP grew up listening to stories about financial insecurity during her parents’ upbringing. The freedom that early retirement brought really appealed to her, and who doesn’t want to retire early anyways?

She is now retired at the young age of 28 and says that she still lives “an incredibly luxurious life.” And, she managed to retire early while living in one of the most expensive places in the world – New York City.

Related articles:

I asked you, my readers, what questions I should ask JP. And, make sure you’re following me on Facebook so you have the opportunity to submit your own questions for the next interview.

So, below are your questions, along with some of mine.

Here is how JP Livingston retired at the age of 28 with over $2,000,000. You can follow her on her blog The Money Habit as well.

1. Tell me your story. How did you manage to retire at 28?

I have wanted to retire since I was about 12 years old. My parents grew up poor. I am talking eight people living in a one room apartment poor. My father’s father passed away when he was 18, and his mother who had previously been a homemaker was only able to find a job at a cookie factory. Her dream for my father was that he would be a busboy and eventually work his way up to be a cook in a restaurant.

My mother’s father passed away when she was in middle school; her mother found work as a seamstress at a large garment factory to support a family of six children.

I grew up on stories of their financial insecurity.

When I started thinking about the future, my parents’ refrain to me was that I could be anything I wanted to be, as long as I had a way to financially support myself.

In middle school, we took a survey on our interests and read about different jobs. I loved to write and wanted to be a writer. When I found out how unsteady the income was for a writer, though, I was demoralized. I decided that if I couldn’t support myself financially by being a writer, I would find a way to retire instead, Then I’d have the freedom work on whatever I wanted, including all the writing I could handle. So I started reading personal finance books.

I learned that you don’t have to be a genius or have special skills to retire early. A habit of making small and regular improvements trumps even the most gifted people who only apply themselves sporadically.

The tactics I’ve employed include optimizing for pay raises and promotions, living a very minimalist and frugal life, focusing on investing skills, and building analytical skills such as understanding how to build and use spreadsheets to support my investment ideas. I found there was an 80-20 rule to different improvements I could make in my money life: 20% of the improvements accounted for 80% of the results. I’ve been trying to outline those major needle movers on my blog so people don’t waste their time as I did on the things that don’t really matter.

All those incremental improvements stacked up into a humming, healthy machine. When I retired at 28, I had a net worth of $2.25 million and it’s still climbing.

2. How did you reach $2,250,000 in savings by the time you were 28? When did you begin saving?

60% of my net worth came from saving and 40% came from growing my money through investing.

My saving habits started in childhood, which isn’t surprising given my parents’ experiences. But what really upped my game was branching out from a few good habits and awareness to trying to find unorthodox ways to save.

One savings move that went against the grain was graduating college in three years. I earned scholarships to attend a state school for free but I chose a private college which I felt would offer broader opportunities. That private college was incredibly expensive though. So in compromise, I graduated a year early.

The savings from that move was not just the tuition costs, but also a full year of missed earning opportunity. My first job was in finance and paid $60,000, with a promise that that if you stuck it out through the entire year you got a bonus that was almost equal to your base. So that one decision to graduate early caused a nearly $150,000 net worth swing.

That kind of savings so early in life, growing at market rates for 20 years would yield $800,000 by the time a person were 42. That’s enough for some people to retire through one decision alone!

Related: How I Paid Off $40,000 in Student Loans in 7 Months

3. What made you want to retire early?

The freedom is really what appealed to me.

I had a very potent reminder of how important freedom was and how little time I had to enjoy it the year before I retired. There were several deaths and major health scares amongst my loved ones. That made me realize that given my family’s history, I had about 15 to 20 really good years of health that I could count on. Did I want to spend even one more of those years stressed out while working?

4. What sacrifices did you have to make in order to reach this milestone?

I’ve rarely thought of my financial decisions as sacrifices. Rather, they were decisions to purchase one thing over another. If I took my bonus into the store and were deciding between a cool new phone or a camera, I wouldn’t leave feeling like I had “sacrificed” the one I didn’t purchase.

I wanted to buy back my time and my freedom more than I wanted to buy anything else in the store. In short, I’ve looked at this is as an opportunity, not a sacrifice. That does wonders for your motivation and mental health.

There is an excellent book that I think provides one of the best frameworks to thinking this way. It’s called Your Money or Your Life, written by Vicki Robin and Joe Dominguez. The general concept is this: take the amount of money you make in a year. Subtract out all your work-related expenses. Now take that balance and divide it by the number of hours you work. That gives you the amount of money you are exchanging per hour of your life. With that metric, you could estimate how many hours of your life a purchase would cost rather than dollars.

Once you start looking at your purchases this way, you will want to buy much less. And investing will start to look amazing to you! It’s a magical way to get more of your life back, because those dollars can go to work in your place, earning you money while you sleep.

5. Would you say that you live comfortably?

I think we live an incredibly luxurious life. There’s still a ton of fat we could cut.

6. What career did you have before you retired? Did that career help you to retire earlier?

I was a professional investor at a finance firm and it definitely helped me to retire earlier. I got really lucky that it ended up being so lucrative; I initially planned on it being a two year stint at most. But the work kept getting more interesting and the pay got better. The frameworks we used for investments also helped me think about my own investment decisions for my personal portfolio.

7. What do you have to say to those who may think that they can never earn as much as you can – can they still retire early too?

They can absolutely retire early!

To me this is the whole point of why the personal finance blogosphere exists. None of us have identical circumstances and identical outcomes. Your childhood may have been more or less advantaged than mine. Your lucky breaks might be better or worse than the ones I experienced. But the absolute truth is this: the you that is making consistent, small improvements over time to your money plan is going to easily accumulate 5x the wealth of the you that isn’t.

It’s not hard to retire early in this country because the bar is so low. The average age of retirement in the US is age 63. After 41 years in the workforce the average 63-year-old couple has a total net worth of $174,000 to show for it. That works out to just over $4,000 of savings per year; less if you assume any investment growth.

8. What do you do now that you’re retired?

The best thing I can do is show you. Here was my actual calendar from a recent week:

Broadly speaking, I have one major project – a personal finance site I write to help others retire early – which I work on for about 10 hours a week, then the rest of the time is filled with hobbies, reading, and being out in the city.

It is amazing how enjoyable the mundane things are when you are not too stressed out to notice them.

9. Many people will have this question in the comments of this interview, I just know it! – Can you explain how you will make $2,250,000 last your whole life, even though you are only 28?

That’s a great question.

My plan is based on data gathered by the Trinity Study. This study calculated that if deployed in a portfolio of stocks and bonds, an inflation-adjusted 4% yearly withdrawal rate from savings was optimal to safely retire and not work for a given 30-year window in the history of the United States.

Thus, if your annual expenses is equal to that 4% yearly withdrawal rate, the idea is that it is very unlikely you will run out of money in a 30-year period.

However, I have some concerns about the riskiness of that 4% figure. For one thing, my retirement is expected to be much longer than 30 years. In addition, if you look at stock market performance in the last 20 years, the compound annual growth rate was 8.2%, almost 2 points lower than the CAGR shown in the period the Trinity Study originally measured. For these two reasons, I plan to live off a stock and bond portfolio withdrawing an inflation-adjusted 3%.

3% of my $2,250,000 would give me $67,500 a year. My husband and I currently spend $65,000 a year living in one of the most expensive cities in the world. That means we could support our current lifestyle almost indefinitely.

But one of the hard parts about retiring so early is that you have to plan for chapters of life that could look drastically different than today. Having children, for example. So before I pulled the trigger, I built a projected budget for a family of 4 to calculate how much I would need to support a family. I did this with empirical data, researching what actual families of four paid for the service in the city I was considering.

The nest egg required to support this budget is $2.23 million, which is within our means.

With early retirement specifically, I think it’s also comforting to walk through your other margins of safety that don’t show up in the budgeting process. Here are a few in our case:

  • Conservative Withdrawal Rate: We are using a withdrawal rate some would argue is half to one percentage point more conservative than needed. That would equate to overstating my nest egg needs by over $400,000.
  • Extra Buffer: We have an extra one hundred thousand dollar buffer that will grow over time and which will absorb costs we haven’t foreseen (i.e. higher healthcare premiums, poor market performance for a year, etc.).
  • Full-Time Work: Either of us could go back to work full time.
  • Income-Earning Hobbies: One or both of us might end up doing a hobby that generates money
  • Tighten Discretionary Purchases: $9,700 or 19% of our annual budget is discretionary and we could tighten our belts in a particularly rough year just as every other family does.
  • ACA Healthcare Savings: We have not factored in any ACA subsidies even though our income in this budget would qualify us.
  • Market Outperformance: Markets could do better than we’ve projected. We require a blended 5-6% return (3% withdrawal, 2-3% inflation). We could easily see market CAGR of 8%+ as evidenced by historical data.
  • Home Equity Loans/Reverse Mortgage: We can draw cash out through a home equity loan if we have a temporary cash crunch or use a reverse mortgage in our old age.
  • Profit-Share Grants: My profit-share grants from my previous employer may be worth greater than the $0 we’ve estimated.

10. Do you still earn an income?

Not currently.

I am not ruling out a traditional job one day, but it would be about finding interesting work and less about the money. My goal right now is to create a place that helps other folks get smarter about money and retire faster, so I might do some freelance writing outside of the blog. But I don’t want to have left one job just to jump into another!

As for other forms of income: I do have some deferred compensation from my old employer. And although my husband could retire as well, he likes what he is doing and continues to work.

11. How did you decide on how much you needed to retire on?

I was a professional investor and the way we used to make our investment decisions was to build out various scenarios, observe the outcomes, and attach a probability to each. I did a similar exercise for determining how much I needed to retire. I used three scenarios to triangulate on a target number. There’s a walk through on the three scenarios which anyone can use to determine their own target retirement number over here.

12. If you were starting back at ground zero, what would you do differently from the beginning?

Two things:

  1. Put Momentum First: I would focus on building momentum more than trying to muscle my way through things with sheer discipline. Most people’s initial reaction to starting a new project is to throw themselves all in. I get emails asking me what book I’d recommend people buy to turn their financial lives around. But think about how you got into your other hobbies. Did you run out and buy a book about proper free-throw technique to get into basketball? Were you consulting a textbook to get into yoga? If the key to millions of dollars is showing up every day and making small improvements, then the key to your success is figuring out how to build momentum in those early days that will get you showing up regularly. That means less of a focus on running out and buying dry, boring textbooks and more effort on joining blogs or forums with bite-sized, regular content where you can start to get your bearings and get interested.
  2. Tackle The Right Steps In The Right Order: There are four steps to early retirement, and tackling them in the right order really accelerates your progress. I wish I had thought deliberately about how the levers in front of me were changing and better prepared myself for the different stages. I’ve missed a lot of great opportunities because I was so focused on the things that had been working for me in the past that I didn’t look up and think about the new opportunities open to me as my wealth accumulated. For example, I wish I had understood the math behind investing in high-appreciation real estate markets year ago. If I had, I would have bought a house in NYC years ago and be $500k richer.

13. Is retiring everything you thought it would be or not as you planned? Do you ever miss work? 

It is a hundred times better than I thought it would be. I will admit there was a learning curve at first. But these days, I often tell my family that I am living a version of my dream life. If you had known me before I retired, you would have found that statement astonishing.

If there is one thing I miss about work, it’s regular interaction with smart and thoughtful people. Since I started the blog, though, I’ve gotten quite a bit of that back. So overall I’m quite happy!

14. Lastly, what is your very best tip (or two) that you have for someone who wants to reach the same success as you?

Ask questions. Be the active commenter on a blog or the vocal one at the cocktail party. Be courageous enough to cold-email the people you know have the answers you need. You can learn so quickly if you’re willing to put yourself out there. People are generous with their experience if you show you’ve done your homework and ask them specific things that make it easy for them to help you.

“Why?” is your most powerful tool. If someone tells you investing in X is the way to go, ask why, and pepper them with all the potential concerns you can think of. Then go find another smart person and ask them why X is a good or a bad idea. Go back to the first and pose the second person’s counterargument and ask them to respond. Introduce another expert. Repeat until you feel you understand the issue backwards and forwards. This is hands down the best way I’ve found to master a concept.

Focus on habits and systems, not results. You can make yourself feel really good by muscling through a one week sprint with discipline and admiring what you accomplish. But really impressive results take weeks and years of focused effort. I have seen a lot of amazing people in college and at my old employer, and the thing that separates the average from the incredibly successful is really just who has figured out how to put out consistent effort.  No one has discipline to last in a marathon like this without building the right systems and habits.  Show up every day and do one small thing to improve the thing you’re measuring. If you do this, you will be among the top 5% of achievers. Over time you will build a system that will trump any specific lucky breaks or windfalls, and it will get you to financial success you deserve.

Are you interested in retiring early? Why or why not?

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Source: makingsenseofcents.com

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For many of my baby boomer clients who are close to retirement, calculating their Social Security Benefits is an important part of the financial planning process. 

It’s important to have a good understanding of the monthly benefit so that we know which other retirement buckets will be producing the shortfall (if any) of their income needed for retirement. 

In many of my client situations, the husband has been the primary breadwinner, so there isn’t much question on their Social Security Benefit.

What does arise some questions is the spouse’s social security benefit. It can be confusing in situations where the spouse worked some years back and is not totally sure to how much they paid into social security.

If you are married, you can claim social security benefits based on your history of earnings or you can collect social security spousal benefits which are equal to 50% of your spouse’s social security benefit.

There are several advantages for married couples and their social security benefits, and you have the ability to receive benefits for a longer period of time in some cases.

If you’re a widow, you can also claim social security spousal benefits.

How Social Security Spousal Benefits Work

You have the option of claiming your own social security benefits, calculated from your work record, or claiming up to 50% of what your husband or wife will receive as your spousal benefit if your husband or wife has filed for social security. 

You can’t collect both your own social security benefits and your spousal benefit at the same time. If you are entitled to both, you’ll receive the larger of the two.

A widow who collects survivor benefits at the normal retirement age (or later) will receive 100% of the deceased spouse’s social security benefit. 

If you file for social security spousal benefits between the age of 60 and your normal retirement age, the amount you receive will shrink 71 to 99%. 

It’s always better to delay receiving social security benefits for as long as possible to increase the amount you’ll receive.

Early Retirement and the Social Security Spousal Benefit

If you begin collecting the spousal benefit before you reach full retirement age, the benefit is permanently reduced over your lifetime.

Before electing for this option, it’s important to understand the implications by having the reduced benefit so early on in your life.

Widows and Social Security Benefits

If your spouse passes away, you’re eligible for the spousal benefit from the age of 60.

If you begin receiving social security benefits before your spouse passes away, you will continue receiving whichever benefit is greater – your own social security benefit or the spousal benefit – but you can’t get both at the same time.

Advantages for Married Couples and Social Security Benefits

If you’re a married couple and can’t afford to postpone receiving your social security benefits, you can use a strategy to help maximize the amount of social security benefits you receive over the long term. 

The technique is called the “62/70 Strategy”, and it makes use of the social security spousal benefits.

The spouse who earned less over their lifetime will file for social security benefits at 62 while the higher-earning spouse delays his or her benefits until the age of 70 when the maximum benefit will be received. 

The higher-earning spouse’s benefit will continue to grow.  If one of you should pass away, the smaller social security benefit will die off as well – leaving the survivor with the higher paying benefit. 

When the higher-earning spouse reaches the age of 70, you drop the social security spousal benefits and start collecting the larger benefit of the higher earning spouse.

How to Claim Social Security on a Divorced Spouse

While the above scenarios are relevant to married couples and widowers, you may be wondering how spousal benefits work after a divorce has occurred. 
Here’s a quick overview.

Do You Qualify for Social Security Benefits under Your Ex-Spouse?

Eligibility requirements for collecting your Ex-spouse’s benefits include the following:

  • You must be age 62 or older.
  • You must have been lawfully married to your spouse for a minimum of ten years.
  • You must be divorced for a minimum of two years.
  • You cannot collect if you are remarried.
  • Your Social Security benefits must be less than your spouse’s.
  • You will collect 50% of your spouse’s entitled benefit.
  • If your spouse has remarried you can still collect.
  • Even if your ex-spouse is not yet collecting you can still collect the benefit as long as you meet all of the requirements.

What If Your Ex-Spouse is Deceased?

If your ex-husband or wife is no longer living you can still collect on their benefits as long as you meet all of the above-stated requirements with a few minor differences.

The main difference is that you will be entitled to collect 100% of your ex-spouse’s benefit if he/she is deceased. You will also be able to start collecting earlier at age 60.

Mike Piper from ObliviousInvestor.com who writes a ton on Social Security (Ex. Social Security for Married Couples) adds, “but if you do claim at age 60, the amount you receive will be reduced.”

Special Circumstances to Consider

There are some special circumstances that you may need to consider. First, if you have been married and divorced more than once you can choose which ex spouse you want to collect on.

As long as you meet all requirements on multiple ex-spouses, you will receive your social security benefit based on the highest collector.

Next, if your benefit is higher than your ex-spouse’s benefit you can delay collecting on your Social Security and collect on theirs instead.

This can be very advantageous allowing your benefit to grow and pay out at a higher amount down the road.

Delaying your benefit by just a few years can make a big difference. At any time you can make the switch to collecting on your benefit rather than your ex spouses’.

Everything Else About Social Security for Divorced Spouse

Finally, if you are planning to collect on your ex spouse’s Social Security benefits here are some other things you will need to know.

  • To apply for the benefit, you will need to supply both a marriage license and divorce decree.
  • You can apply on line, by phone or in person at your local Social Security Office.
  • If you continue to work while collecting on your spouse’s benefits their earning limits will apply to you.
  • If you are collecting a pension the amount of your benefit may be lower.
  • Collecting on your ex spouse’s Social Security will not cost your ex any money or alter what they are entitled to collect.
  • If you did remarry but your new marriage has ended either due to your spouse’s death, a divorce or an annulment you are entitled to collect on your ex’s benefits. You can apply and collect benefits any time after your marriage has ended as long as you meet all other requirements.

To get some exact calculations on your social security benefits when divorced, I would suggest that you contact your local social security office. That way there’s no question on how much your entitled to.

Need Social Security Assistance?

If you’re having a tough time trying to understand your Social Security benefits, your best resources are to visit www.ssa.gov or call your local Social Security office. 

I had an instance where I had a question on Social Security benefits and wasn’t sure who to call. 

Knowing nowhere else to turn, I called our local office and got to someone right away. They were able to answer my question immediately – and it was a fairly complicated question.  

Kudos to them!

Source: goodfinancialcents.com

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For most people, retirement means something that only older people do after decades and decades of working. However, more and more people are thinking about early retirement. And, when I say early retirement, I mean being financially secure enough that you don’t need to work unless you want to.

Even though it takes a lot of work and planning to retire early, some people seem to think that early retirees aren’t very smart, are lazy, or even boring.

I see this a lot when I read articles about people who have retired early. I always scroll down to the comments of these articles because I find it interesting to see what people have to say about early retirement. I’m always shocked, and saddened, when I read comments that say these early retirees are being careless and won’t be able to live exciting lives after they retire.

Some people assume these people haven’t saved enough and are naively thinking their money will last forever. Some assume early retirees just want to stop working because they are lazy. Others think that early retirees just sit around all day and do nothing in order to save money.

However, none of these common myths about early retirees are true!

And, I just don’t understand these negative feelings about early retirement because I personally love the idea of people striving to retire early.

Really, what could feel better than working hard to your save money, investing it well, and then realizing the financial freedom you have to quit your day job so you can live your dream life!?

Whether you want to travel, continue working (yes, you can continue working your job! There’s no rule that you have to quit), spend more time with family, or whatever else, retiring early gives you the ability to choose your own future.

Plus, early retirement can be at whatever age you want it to be, it doesn’t have to be that you retire early at age 30. If you are able to retire at age 60, that’s awesome! The point is just to strive to better yourself so that you can be financially free and not stuck and miserable in debt, and/or living a paycheck to paycheck life.

Sadly, there are many out there, who do not save enough money when preparing for retirement. According to one survey, 56% Of Americans Have Less Than $10,000 Saved For Retirement. According to a different survey done by Bankrate.com, 36% of people in the U.S. have absolutely nothing saved for retirement.

Due to the above, I think it’s obvious that more people should make saving for retirement a priority.

And, even if you love your career, you can still think about early retirement.

I have saved enough to retire whenever I would like. Yes, I earn a high income, but I also save a large part of my income and watch any wasteful spending.

Now, don’t get me wrong, I absolutely love life and my online business. However, knowing that I can retire early means I am prepared for whatever might happen in the future. As you know, I’m a worrier, and I would much rather be safe than sorry. There are so many what ifs, like there could be a medical emergency, the industry may change, I may change, and so on.

You just never know what may happen in the future!

Related:

To me, having the ability to retire early is all about freedom and flexibility.

Now, I’m not going to automatically assume that extreme early retirement is for everyone. Because, it’s not.

Not all early retirement paths have to be extreme – some can actually be quite normal. Many people can still live a normal life, without really cutting too much out. It’s all about being realistic with your income and spending.

The majority of the population does not seem ready for retirement at any age, let alone the retirement age of around 65-67, so to discount early retirees altogether just seems crazy to me.

Whether you’re thinking about early retirement, still planning for a “normal” retirement age, or are just confused about what these early retirees are thinking, this post will, hopefully, debunk any myths you may have about early retirement.

Related content:

Are early retirees dumb, lazy, and/or boring?

Are early retirees naively thinking that their money will last forever?

This is one of the most common myths I hear about early retirees. Many like to assume that early retirees haven’t thought about possible future expenses, such as from having children, health insurance costs rising, inflation, the stock market dipping/crashing, and more.

However, planning for early retirement definitely takes all of these expenses into consideration.

For most early retirees, it starts with creating a budget that allows them to really know their expenses and save for them well into the future.

Related content: The Complete Budget Guide: Creating A Budget That Works

A person planning for early retirement is thinking about all of these what ifs well into the future. While no one’s calculations are going to be correct down to the penny, it is possible to factor in possible future expenses.

Still, many people don’t believe that early retirement is possible. I have heard countless people say that retiring early is dumb because $1,000,000 – $5,000,000 isn’t enough to retire young, that early retirees aren’t thinking about future expenses, etc.

I believe this has a lot to do with the fact that many people don’t understand compound interest and investing. Both of these things let your money work and grow for you, well into the future, meaning that an early retirees’ retirement funds are most likely going to grow well into the future. I have seen countless comments where a person just divides $1,000,000 by 50 years and assumes that the early retiree is living off of $20,000 a year and not a penny more for the rest of their life.

However, that’s not how investing and early retirement works.

If you want to learn how investing works and how you can start saving for early retirement, read more at How To Start Investing.

Honestly, early retirement is possible.

By saving enough of your money and living off a designated percentage of your savings or invested income each year after you retire early, you will find that early retirement is possible.

Before throwing the whole idea out, you may want to look into how it may be possible for you.

Retirement Calculator: https://networthify.com/calculator/earlyretirement

As you can see from the above:

  • With just a 1% savings rate, it would take you 98.9 working years until you reach retirement.
  • A 5% savings rate means that it would take you 66 working years to retire.
  • A 20% savings rate means that it would take you 37 working years to retire.
  • A 50% savings rate means that it would take you 17 working years to retire.
  • A 75% savings rate means that it would take you 7 working years to retire.

So, by saving more of your money, you are likely to retire sooner. Makes sense, right?

Related content: Do You Know Your Net Worth?

Are early retirees lazy and just not wanting to work?

I’m going to be honest, this myth is absolutely crazy! If you are planning for early retirement, you definitely aren’t lazy. Like I said before, it takes a lot of planning and forethought to retire early. It’s not at all for the lazy!  

However, I have heard so many people say this about early retirees. And, I think it’s the exact opposite.

If you are looking to retire early, you probably aren’t the type to just sit around all day. I mean, if that’s your plan for after you retire, that’s totally fine because you get to choose. But, for many, early retirement isn’t just about not working. It’s about having the freedom to spend your time pursuing your passion, traveling, spending more time with friends and family, and more.

Still, I have heard so many times that early retirees are lazy and are just looking for a way to escape the work world and essentially be homeless, live in a shack, eat rice and beans, etc., instead of working.

I believe early retirees are hard workers who want to live life on their own terms. After all, they had to save enough to retire early some way – and I’m sure it wasn’t due to any laziness.

Don’t early retirees just sit around all day in order to save money?

I have heard countless people say that early retirees are boring, lead meaningless lives, and probably just sit around all day doing nothing. Some of these same people justify not saving for retirement by saying that they’d rather work until they’re 70.

I don’t know how much fun the average person has while working, but I’m fairly positive that the average person is probably not in love with their job. In fact, it is somewhat rare for a person to be absolutely in love with their job. Yet, I still hear this myth all the time.

An early retiree isn’t just going to sit around all day. Even if that’s what they want to do, who cares?!  Retiring early certainly doesn’t mean that you have to be bored.

With all the extra time you have after retiring early, you could volunteer, pursue a passion, find fun things to do, take up a hobby, and more.

Heck, you could even continue working, if that’s what you truly desire. Early retirement just gives you choices in case something changes in the future.

I know that for me, if I chose to stop working one day, I could easily find time to fill my day outside of work. I could travel even more, go on more long hikes, be more fit, read more, learn more (I’ve been wanting to learn a new language), find a passion project, spend more time with friends and family, etc. The list is endless!

The average early retiree, that I know, has a very active and meaningful life. They don’t need work in order to feel valued in the world; instead, they find other things to make themselves happy.

Plus, just because you are saving for retirement doesn’t mean you are eating ramen noodles for breakfast, lunch, and dinner. However, this is a myth that is often associated with early retirement.

Sure, a person who seeks early retirement or who has already retired early may be frugal, but I highly doubt that the majority of early retirees live boring and uneventful lives.

There are plenty of ways to have frugal fun, eat on a budget, and so on. You can even see the world, while saving for early retirement, too. We currently live in our RV, while traveling North America (yes, I know that’s not the world), and we have met many early retirees who are doing the same. Remember, the best things in life are free. The outdoors, spending quality time with those you love, laughing, and more are all FREE.

When do you want to retire and when WILL you retire? What do you think of early retirement?

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Source: makingsenseofcents.com

Apache is functioning normally

Last Updated: July 2, 2017 BY Michelle Schroeder-Gardner – 24 Comments

Disclosure: This post may contain affiliate links, meaning I get a commission if you decide to make a purchase through my links, at no cost to you. Please read my disclosure for more info.

A few months ago, Joe from Retire by 40 published the quiz How Serious Are You About Early Retirement? I took the quiz (BudgetsAreSexy did too!) and found it informative and entertaining. I thought it would be fun to share my answers with you and let you know about the early retirement quiz, if you haven’t taken it yet.

Early retirement is a great financial goal to have.

Related articles:

For us, I don’t know when or if we will ever completely stop working, but having the option to is important.

Looking at early retirement as a goal, whether you stop working completely or not, means financial stability is a top priority for you. You just never know what may happen, and that stability is always a great thing to have.

Here are the directions for the quiz: “You need to keep track of your own score for this quiz. The questions are just TRUE/FALSE. You get a point for every TRUE. Then simply put your score in the poll at the end.”

Here’s the quiz:

1. You know your net worth

Yes, I know my net worth!

Tracking your net worth with a platform such as Personal Capital is a great way to stay on track and stay motivated.

2. You have a Roth IRA

Yes!

3. You have no consumer debt – car, credit card, etc…

We have no debt. We do some travel hacking (learn how to get to Hawaii for less than $25) but we pay off our credit cards every single month.

And, yes, even our RV was paid for with cash.

4. You have a “retire by” date

We have a date, but we are not super strict about it. We could retire right now if we wanted to, but we have chosen to keep working because we love what we do so much.

5. You have a side hustle or two

I have many different streams of income. However, I don’t currently have anything outside of my business going on. I think I’ll still give myself a point for this because I used to side hustle like crazy 🙂

Related: How To Make Extra Money

6. You have passive income

Yes, I have passive income through affiliate marketing on my blog. This isn’t considered 100% passive as I do need to do a little bit of work, but I’m still going to count it.

Plus, I also have retirement accounts that pay dividends.

7. Your investments are worth more than your house

Yes, our investments are worth more than our RV.

8. You have a post retirement plan – volunteer, etc…

We currently live a very exciting life and will probably be doing something quite similar even when we retire.

9. You save 50% of your household income

Yes, we currently save over 90%.

10. You have backup plans

Yes, we do have a backup plan. If things go downhill, then I am all about workamping – volunteering at campgrounds at national parks and state parks in return for a free campsite and electricity 🙂

Bonus point – You cut your own hair

Ha, nope! My hair is my one splurge. I like to have it colored different ways (multiple times a year), and I do get a haircut about once a year.

Early Retirement Quiz Scoring:

  • 0-5: Skeptic. Do you believe in early retirement? Perhaps it’s not a goal of yours?
  • 6-7: Novice. You’re on your way to early retirement!
  • 8-9: Committed. You’ll get to early retirement soon.
  • 10+: Driven. Early retirement is definitely on your mind, or you may even already be retired!

I scored 10 points on this early retirement quiz. And, early retirement is definitely something I am aiming for, although it’s just the independence that I’m crazy about because I still do love to work.

Now, even if your score wasn’t what you hoped, you can still work towards early retirement. It probably just means that you need to be aware of where you are at and where you want to be. Remember, being aware of your situation is the first step!

What was your early retirement score? Share in the comments and let’s start a discussion!

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Source: makingsenseofcents.com

Apache is functioning normally

Hello! Dividend investing is a very interesting topic. Today, I have an expert who has appeared on Forbes, Motley Fool, MSN Money, TheStreet, and more, and he is going to share tons of great information on this subject. You may remember him from his previous contribution How I Became A Successful Dividend Growth Investor. This is a guest contribution by Ben Reynolds.  Ben is the CEO of Sure Dividend.  Sure Dividend helps people build high quality dividend growth portfolios for the long run.

Early retirement is the financial state of being where you don’t have to work.  You only work if you want to.

Early retirement is reached when your passive income exceeds your expenses.  The average retirement age in the United States is 63.

Retiring at any age is an accomplishment, but I think you will agree with me when I say that the earlier you retire, the better.

There are 6 key factors that determine how long it will take for you to reach retirement:

  1. Your income (how much money you make)
  2. Your savings rate (the percentage of your income you save)
  3. Your expenses (how much money you spend)
  4. The size of your investment account (how much you already have saved)
  5. Your investment returns (how fast your investments are growing)
  6. The yield on your investment portfolio (how much your investments pay you)

Making Sense of Cents has phenomenal information on increasing your income and savings rate, and reducing your expenses.  These are all vital aspects of retiring early.

The size of your investment account now is based on your past decisions and for some people, being born into a wealthy family.  It is what it is; you can’t change it.

How you invest will determine your investment returns and the yield on your investment portfolio when you are (early) retired.

I believe that dividend growth investing is uniquely situated to offer individual investors a way to build a portfolio for rising passive income that will lead to early retirement (depending of course on your income and expenses).

Related: What Are Dividends & How Do They Work? A Beginner’s Guide

What Is Dividend Growth Investing

Dividend growth investing is what it sounds like.  The core idea of dividend growth investing is to invest in businesses via the stock market that are likely to pay growing dividends over time.

As an example, Johnson & Johnson’s (JNJ) dividend history over the last 20 years is shown below:

Source:  Johnson & Johnson Investor Relations page
Note:  The 2017 number shows dividend payments to date.  It will be higher than 2016 by the end of the year.

As you can see, Johnson & Johnson shareholders have seen their dividend income grow from $0.43 a share in 1997 to $3.15 a share in 2016.  This is a 7.3x increase.  More importantly, that 7.3x increase in income came without buying additional shares.

Dividend growth investing has a hidden benefit.  It focuses you on the business, and not on the stock price.  This means less (and hopefully no) panic selling during recessions.  In fact, many dividend investors take advantage of market declines by purchasing into great dividend growth stocks while they are trading at a discount.

The reason dividend growth investing matches up with building an early retirement portfolio so well is because it provides rising income over time.  This is a powerful feature that is not a characteristic of investing in bonds, gold, Bitcoin, or stocks that don’t pay dividends.

Reinvesting Dividends and Early Retirement

A portfolio that creates rising income over time is powerful.  You can ‘super charge’ growth by reinvesting dividends back into the portfolio.

When Johnson & Johnson pays its dividend, instead of taking it in cash, you can use that dividend to buy more shares of Johnson & Johnson.  You can see how this can greatly increase your passive income stream in the future in the example below.

Johnson & Johnson currently has a dividend yield of 2.6%.  The company has grown its dividend at 11% a year from 1997 through 2016.  Forecasting 11% a year growth ahead may lead to disappointment; there’s no guarantee Johnson & Johnson will continue such strong growth. 

Say the company grows its dividend at ‘just’ 7% a year going forward.  If you are reinvesting dividends, your income stream from Johnson and Johnson will grow at 9.6% a year.  Your income growth is simply the expected dividend per share growth rate plus the company’s current dividend yield (if dividends are reinvested).

With 9.6% a year compounding, your income from Johnson & Johnson will double about every 8 years.  I don’t know many other situations outside of dividend growth investing where you have a high likelihood of doubling your income in under a decade.

Strong income growth over time is why dividend growth investing can help you achieve early retirement.  It isn’t instantaneous, but it is achievable.

Where to Find Great Dividend Growth Stocks

Johnson & Johnson is a strong dividend growth stock…  But it’s not the only one.  There are other great businesses with long histories of increasing their dividend income every year.

My favorite place to find potential dividend growth stocks worthy of an early retirement portfolio is the Dividend Aristocrats Index. 

The Dividend Aristocrats are a group of 51 stocks in the S&P 500 with 25+ consecutive years of dividend increases.  A few examples of well-known Dividend Aristocrats are below:

  • Aflac (AFL)
  • 3M (MMM)
  • Coca-Cola (KO)
  • Wal-Mart (WMT)
  • Exxon Mobil (XOM)
  • Procter & Gamble (PG)
  • Johnson & Johnson (JNJ)

The Dividend Aristocrats index is made up of businesses with long histories of rising dividends.  A company simply cannot pay rising dividends for 25+ consecutive years without a strong and durable competitive advantage.

Why do competitive advantages matter? Warren Buffett himself says they are the key to investing.

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” – Warren Buffett

Not surprisingly, the Dividend Aristocrats Index has outperformed the S&P 500 over the last decade by 2.8 percentage points a year…  With lower volatility.

Source:  S&P Fact Sheet

To put this into perspective, $1.00 invested in the Dividend Aristocrats index 10 years ago would be worth $2.59 now, versus $2.00 for the S&P 500 (both numbers include dividends).  Moreover, your portfolio wouldn’t have had as severe price swings, because the Dividend Aristocrats index has lower volatility than the S&P 500.

Final Thoughts

There’s no question building a portfolio for early retirement can be complicated…  But it doesn’t have to be.

By investing in individual great businesses and holding them for their rising income potential (dividend growth investing), you can build a portfolio that is very likely to pay you rising income over time. 

And importantly, investing in individual stocks eliminates costly management fees from mutual funds and ETFs so your money is left to compound in your account, where it belongs.

The bottom line is that retirement requires a stream of income in excess of your expenses.  That income stream must also grow at least as fast (though preferably much faster) than inflation.  Otherwise, you lose purchasing power – and you won’t stay retired for long.

Dividend growth investing can create growing income streams that are likely to rise well in excess of inflation.  The unique characteristics of dividend growth investing are a compelling match for those seeking early retirement.

Are you interested in dividend investing? Why or why not?

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Source: makingsenseofcents.com

Apache is functioning normally

If you work for a company that has a pension, should you be worried?
What protections do you have?
Will all the money you have been paying into your retirement just be gone?
Recently, American Airlines filed for Chapter 11 bankruptcy leaving many wondering “What happens to their pension?“.
Whether you’re an employee of theirs or any other company that offers a pension, here’s what you need to know.

Insurance On Your Pension Plan

Fortunately, it is not as bad as most people think…maybe.  There are safeguards in the United States to prevent you from losing your pension plan.
In the United States, every defined-benefit retirement plan is insured, at least to a point.  Most will receive all or at least most of their company pension even if your company goes bankrupt.  However, in some cases,  it may not be every penny you expected.
(Also, be sure to check out my article on, Should I Roll My Pension Into an IRA for some options on your pension plan.)

What Happens When a Company Goes Bankrupt?

When a company goes bankrupt they have two choices. They can reorganize and try to stay in business by reducing costs and attracting new investors, or they can liquidate. 
The pension plan is usually terminated in reorganization and always terminated in liquidation.
So, then what happens? A federal insurance agency called the Pension Benefit Guaranty Corporation (pbgc.gov) takes over the pension payments.
Here’s some information on the PBCG taken from their site:

The PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. It currently guarantees payment of basic pension benefits earned by 44 million American workers and retirees participating in over 29,000 private-sector defined benefit pension plans. The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and by investment returns.

Only employees with the largest pensions actually take a hit. The Pension Benefit Guaranty Corporation maximum annual payment, which rises with inflation, is $54,000 this year for workers who retire at age 65. 
As with any insurer, the PBGC has some restrictions. For example, it prorates recent pension increases.
However, in all, 84 percent of retirees get their full pension even after bankruptcy.

A Few Rare Cases Under Reorganization

In a few rare cases of a company bankruptcy reorganization, the employer maintains his/her pension plan. That normally only happens for one of three reasons.

  1. The benefit is low
  2. Employee turnover is high
  3. The pension plan is new

 

Avoiding Bankruptcy is Better For The Company

In most cases, however, it is always better for the company to avoid bankruptcy altogether. In December of last year, Congress gave some help in this direction by relaxing the 2006 Pension Protection Act’s strict rules governing pension funding. 
As counter-intuitive as it may seem, this is one move that endangered workers should embrace.
As a result of this move, according to Dallas Salisbury, president of the non-partisan Employee Benefit Research Institute, “Given the economic downturn, employees are better off than if the company was forced to make a large pension contribution. It’s better to stay in business than make a pension contribution.”

American Airlines Pension

In American Airline’s case, they are filing for Chapter 11 bankruptcy protection. In this case, the PBGC may need to step in and assist with their pension obligations.
The Pension Benefit Guaranty Corp., created to protect private retirement benefits, may be unable to cover the loss because Congress has limited the size of pensions it can pay, Director Josh Gotbaum said in a statement.

“Unfortunately, when the agency assumed airline plans in the past, many people’s pensions were cut, in some cases dramatically,” Gotbaum said in the statement. The PBGC will encourage American to “fix its financial problems” and keep its pensions intact, he said.

In the meantime, AMR employees seem to be protected. But a quick look at the numbers doesn’t seem too reassuring.
Recent numbers show that they have about $8.3 billion in assets to cover the $18.5 billion in pension liabilities. If AMR has no choice and has to terminate the plan, that would leave the PBGC on the hook for a cool $17 billion.
Chump change for the PBGC, right?  Don’t be so sure…
 

Strength of the Pension Benefit Guaranty Corporation

Just like the FDIC, the financial strength of the PBGC hardly ever gets questioned. Unfortunately, these are unique times and it seems that no entity is out of harm’s way. 
Lowering interest rates and rising corporate defaults has led to a $33.5 billion deficit in the first quarter of 2009 for the PBGC.  This is the largest deficit for the 35-year-old agency which is an increase from the $11 billion deficit ending fiscal year 2008. 
Acting director Vince Snowbarger says,

“The PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums. Nevertheless, over the long term, the deficit must be addressed.”

The Deficit Continues

For 2011, the PBGC just encountered it’s largest deficit while insuring 1 out of every 7 Americans. The Pension Benefit Guaranty Corp. was quoted as saying it ran a $26 billion imbalance for the budget year that ended Sept. 30.
Their pension obligations rose by $4.5 billion as they currently insure over 44 million Americans. Does it make you nervous? It would make me.

How Does This Affect You?

If your company files for bankruptcy or you fear that it will, I would contact the PBGC and talk to them directly. 
Be sure to visit their website frequently and check for updates. You are basically in their hands and you have limited choices.
If you have the option, consider rolling your pension into an IRA to get it out of your company’s hands. I’ve had many clients do this so that they never had to worry about this.
Be sure to consult a financial planner and/or tax advisor before implementing this step.

Source: goodfinancialcents.com