The Reality of Early Retirement
An early retirement is usually on everyone’s “wish list.” A relaxing lifestyle in a warmer climate or the pursuit of a hobby or personal interest typically characterizes the vision of what retirement is all about. If you’re considering an early retirement, you may be asking yourself, “How do I do it?”
The key is to take a proactive role in role in your retirement planning. Naturally, the sooner you begin planning, the more you increase your chances for early retirement. Some retirees may require as much as 80% of their preretirement income to meet expenses and maintain their desired standard of living. With the decline in the popularity of traditional defined benefit pension plans, people today are more and more responsible for funding their own retirements.
There are many factors that are redefining how Americans approach retirement. Due to financial necessity, or sometimes just an overabundance of leisure time, some retirees are beginning to reenter the workplace. Many retired executives start their own part-time consulting businesses; others trade in their hectic seventy hour workweeks for a type of pseudo retirement, in which they work a lot less and spend more time with their families. Part-time work during retirement can be an important income supplement, especially if you plan on retiring early.
Another interesting factor changing the shape of retirement is that life expectancies are increasing. For some, spending one-third of their lives in retirement is a possibility. Relying on retirement plans and Social Security will be increasingly difficult because these retirement mechanisms were not designed to perpetually provide income. Furthermore, as longevity has increased, retirement plans have gradually shifted the savings responsibility from employers employ to employees employ . The pressure of building adequate retirement savings has been placed directly in the hands of a larger portion of the workforce, who often must take initiative and contribute to their company sponsored retirement plans. Your retirement assets, as well as your personal savings, will have to work longer and harder to help fulfill your personal objectives, regardless of whether you retire early or not.
An often overlooked aspect of planning is money management once retirement has begun. To help ensure an adequate pool of retirement assets, your money will have to continue working for you throughout your retirement years. Inflation—along with the amount of income withdrawn from your retirement plan— will have a direct effect on how long you can live comfortably. Thus, personal savings will continue to be an overall part of your retirement plan.
Budgetary constraints will also determine your retirement lifestyle. In order to better ascertain your financial picture, it is best to project what your retirement income and expenses will be. Unfortunately, this process may be more difficult than it sounds. You will need to consider everything from greens fees at the local golf course to health insurance costs. In addition, you will have to factor in inflation and how your income needs may change throughout the years.
For those who desire an early retirement, certain penalties may apply for early withdrawals from retirement plans. All options need to be studied, and the consequences of any action taken should be reviewed with a qualified professional.
It’s Your Retirement: Be Involved!
Today, early retirement is still a viable possibility. Remaining on firm ground financially and working part-time can become integral parts of a successful retirement. By maximizing your personal savings to the best of your ability, you will increase your chances of reaching your retirement goals. Remaining active and focused on attaining your retirement goals is particularly necessary if you are contemplating, or are forced into, early retirement.
Life Insurance and Divorce: Protecting Your Family
Sometimes in life things don’t work out as we plan. One of the most trying examples of this is when a couple decides they can’t make their marriage work and, subsequently, file for divorce. Divorce takes a significant financial and emotional toll on both parties, their children, and other family and friends. In the midst of the immediate financial and legal concerns, couples need to look beyond the present to help ensure that their financial futures are secure and that the future needs of children, such as education expenses, will be provided for in the event of an untimely death. Life insurance may offer a solution.
The future educational expenses of college-bound children are growing. According to The College Board’s annual report, Trends in College Pricing—2007, the average sum of tuition, fees, room, and board for the 2007–2008 school year was $13,589 at public colleges and $32,307 at private colleges. Because educational expenses are only expected to increase, the need to plan for future financial security during divorce becomes even more paramount. Let’s look at several different scenarios.
Consider Potential Circumstances
After divorce, if the spouse paying alimony and/or child support were to die, then the custodial parent may be hard-pressed to maintain the children’s current lifestyle, let alone be able to afford the potentially significant college fees. On the other hand, if the custodial parent were to die prematurely, the ex-spouse may be at a loss to cover daily childcare expenses. For these reasons, divorcing couples may want to strongly consider making life insurance policies part of the divorce decree.
A custodial parent may want to look into purchasing a life insurance policy on his or her ex, but if this turns out to be an impossibility, transferring ownership and beneficiary arrangements on an existing policy may be another option. If policy premiums fall outside of the budget, the custodial parent may request alimony or child support increases to cover the costs. If the non-custodial parent remains the policy owner, the divorce decree can include arrangements to ensure the custodial parent is named as the irrevocable beneficiary and receives ongoing proof that the payments continue to be made and the policy remains in effect. A parent without custody may wish to keep the policies he or she already has to protect the financial interests of other family members, such as children from a new marriage. In this case, the non-custodial parent should consider purchasing a new policy on his or her life with the ex as the owner and beneficiary. If this is done before or during the divorce proceedings, gift tax will not be owed. Premiums may be tax deductible as alimony if policy ownership belongs entirely to the ex.
Update Existing Policies
For existing policies, individuals should remember that the insurance company must be notified of any beneficiary changes: Using a will for this purpose will not be valid. In addition, should the insured remarry and the policy name the “husband” or “wife” of the insured as the beneficiary, the new spouse may receive the proceeds. If the insured does not remarry and this same policy language is in force, then the proceeds may be paid to the secondary beneficiary. If the insured’s estate is named as the new beneficiary, insurance proceeds will likely be held up in the probate process. If minor children are named as the new beneficiaries, additional problems may arise, as insurance companies generally will not pay minors directly. For this reason, it may be a good idea to create a trust for minor children and name the trust as the beneficiary of the policy proceeds.
Laws vary from state to state, so consulting with your tax and legal advisors is very important. Divorce is rarely easy, but with a well planned strategy, the short- and long-term financial needs of children can be ensured should life take an unexpected turn.
Keeping Focus On Your Finances
Many individuals find the notion of creating a budget about as appealing as performing seasonal chores such as raking leaves, mowing the lawn, or shoveling snow. However, most people would agree the yard work is well worth the effort in achieving picture-perfect surroundings.
Two financial “snapshots” you can take at anytime to help showcase your financial landscape are a balance sheet (or (or net worth statement) and a cash flow statement. In addition to showing you where you stand today, they can help provide the basis for important financial comparisons in the future future . Although there are a lot of computer software programs available that can help with budgeting needs, it can also be easy, and sometimes helpful, to construct your own worksheets.
Assessing Your Net Worth
To create a balance sheet, simply draw a line down the center of a blank piece of paper and label one column “ Assets” and the other “Liabilities.” Assets are everything you own, and liabilities are everything you owe.
You can add a little structure by grouping your assets into three categories: 1) cash or cash equivalents— checking and savings accounts, money market funds, and certificates of deposit (CDs); 2) investments—stocks, bonds, mutual fund accounts, and retirement accounts; and 3) personal property—your house, home furnishings, autos, boats, and other personal use items.
Liabilities can be labeled as follows: 1) short-term—auto loans, most personal loans, and credit card debt; or 2) long-term—home mortgages, some home equity loans, and some educational loans.
Enter all of the relevant numbers and add up the two columns. We’ll examine the outcome later.
How Fluid Is Your Cash Flow?
Next, you will need to create a cash flow statement. Divide a piece of paper down the middle and label one column “Cash Inflow” and the other “Cash Outflow.” On the inflow side of the ledger, list monthly (or yearly) income from all sources such as wages, self-employment, rental activities, and investment income (e.g., interest and dividends).
On the outflow side, list all monthly (or yearly) expenditures, separating fixed expenses (e.g., mortgage payments, other periodic loan payments, and insurance premiums) and variable or discretionary expenses (e.g., utilities, food, clothing, entertainment, vacations, hobbies, and personal care). You might want to put taxes (federal, state, FICA) in a separate category. Again, plug in the relevant numbers and total the columns.
If your balance sheet shows your assets exceeding your liabilities, you have a healthy net worth, especially if your cash flow statement shows more inflow than outflow. This picture shows that you are solvent and spending within your means. The degree of financial health depends on the size of your surpluses.
Your financial outlook may be less positive if your balance sheet shows your liabilities exceeding your assets and/or your cash flow statement shows more outflow than inflow. This picture indicates that you are spending beyond your means, so it may be wise to assess the areas in which you can decrease your liabilities.
Two goals worth pursuing are increasing your net worth each year and keeping your annual expenditures under control. If your financial picture is a little out of focus, taking action now to sharpen the view will make your financial future much more promising.
Seven Steps to Financial Success
Even well-compensated individuals sometimes find it difficult to achieve long-term success when it comes to their personal finances. Although they may attain a comfortable level of income, their primary focus may be on developing their professional careers—to the exclusion of securing their personal financial future.
Yet, it doesn’t necessarily require a huge allotment of time to get things moving in the right direction. It is often simply a matter of understanding the “basics.”
- Pay yourself first. Transfer a set amount from your earnings to your savings each month. An investment of $1,000 per month earning 8% annual interest could grow to over $180,000 before taxes in just ten years.
- Reduce consumer debt. Avoid high credit card finance charges by paying off the balances monthly, or if you must carry a balance, use only cards offering low rates.
- Diversify your savings. Develop a plan for your short- and long-term needs. Bear in mind your liquidity needs, risk tolerance, and time horizon.
- Take advantage of tax benefits. If you qualify, contribute to an Individual Retirement Account (IRA), a 401(k) plan, or another similar retirement plan. These plans offer tax benefits that can help enhance your retirement savings.
- Update your estate plan. Have your will and any trusts reviewed by a lawyer. Prepare advance directives, such as a durable power of attorney, living will, and health care proxy.
- Review insurance needs. Periodically review your risk management program. Your life, health, and disability income insurance needs will likely change as you progress through the stages of life.
- Set long-term financial goals. Establish one-, three-, and ten-year goals. Evaluate your progress yearly and make adjustments as appropriate to achieve long-term success.
Make a commitment now to start this planning process. Attention to these seven basic areas can help you achieve a secure financial future.