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Nov / 17

The Radical Personal Finance Guide To Early Retirement

You’ve probably heard of the FIRE movement (Financial Independence, Retire Early). The idea is to save like a maniac and invest your money in a way that allows you to live off of the earnings while you’re young.

While the FIRE movement has gained a lot of traction in recent years, there are still a lot of people who are hesitant to jump on board. After all, retiring early sounds like a pipe dream, right?

Wrong.

With a little bit of planning and a lot of discipline, retiring early is a very real possibility. In fact, it’s something that I’m working towards myself. In this guide, I’m going to show you how you can retire early, too.

First, let’s start with the basics.

What is Early Retirement?

Early retirement is, quite simply, retiring before the traditional retirement age. For most people, that age is 65. But with early retirement, you could retire in your 40s, 30s, or even sooner.

There’s no one-size-fits-all definition of early retirement. It simply means retiring earlier than the norm.

Why Would Someone Want to Retire Early?

There are a lot of reasons why someone might want to retire early. Maybe they want to spend more time with their family. Maybe they want to travel the world. Maybe they want to pursue a passion project. Or maybe they’re just sick of the rat race and want to live a simpler life.

Whatever the reason, there are plenty of people who are interested in retiring early. And there’s nothing wrong with that.

Is Early Retirement Right for You?

Now that you know a little bit more about early retirement, you might be wondering if it’s right for you.

The truth is, there isn’t a right or wrong answer. It’s a personal decision that you’ll need to make for yourself.

There are, however, a few things that you should consider before making the decision to retire early.

First, you’ll need to think about your financial situation. Can you afford to retire early? Do you have enough money saved up? Do you have a solid investment plan in place?

You’ll also need to think about your lifestyle. Are you the type of person who likes to be constantly busy? Do you enjoy working? Will you be happy with a more relaxed lifestyle?

Finally, you’ll need to think about your health. Are you in good health? Do you have any health concerns that could impact your ability to retire early

Nov / 12

What To Expect When Shopping At A Whirlpool Store

When you walk into a Whirlpool store, you can expect to find a wide variety of appliances. Whether you’re looking for a refrigerator, a stove, or a washer and dryer, Whirlpool has a appliance for you. The sales associates at Whirlpool are knowledgeable about the products and can help you find the perfect appliance for your home.

In addition to appliances, Whirlpool also sells parts and accessories for your appliances. If you need a new filter for your refrigerator or a new knob for your stove, you can find it at a Whirlpool store. Whirlpool also sells a variety of cleaning products to help you keep your appliances looking their best.

If you’re looking for a great deal on appliances, be sure to check out the clearance section at a Whirlpool store. You can find some amazing deals on appliances that have been discontinued or are overstocked.

When you shop at a Whirlpool store, you can expect to find a wide selection of appliances, parts, and accessories. The sales associates are knowledgeable and can help you find the perfect appliance for your home. You can also find some great deals on appliances in the clearance section.

When you shop at a Whirlpool Store, you can expect to find a wide selection of appliances. Whether you are looking for a new refrigerator, oven, or washing machine, you will be sure to find what you need. The sales staff at these stores are also very knowledgeable and can help you find the right appliance for your home.

In addition to a great selection of appliances, you can also expect to find a wide variety of Whirlpool accessories. From dishwasher detergent to replacement parts, you will be sure to find everything you need to keep your Whirlpool appliances running like new.

If you are not sure what you need, the sales staff at Whirlpool Stores can also help you figure out what you need. They can ask you questions about your lifestyle and needs and then help you find the right appliance for your home.

When you shop at a Whirlpool Store, you can expect to find a wide selection of appliances and a knowledgeable sales staff. With a little help, you will be sure to find the right appliance for your home.

Nov / 18

Don’t Wait for Retirement — Live the Life of Your Dreams Now

Many people view retirement as a 30-year vacation, full of leisure and travel. But new retirees often find that retirement isn’t the carefree life they expected. They miss having social interactions, a sense of achievement and daily structure — and as a result, some experience weight gain, marital discord, depression or substance abuse.

And many retirees, especially those who retire early, end up returning to the workforce.

Retirement often looks different today than it has in the past. And as you reconsider how you want to spend your golden years, it’s a good idea to contemplate big-picture life goals and current desires.

Maybe some of those dreams don’t have to wait until retirement.

Rethinking retirement

Rather than leave careers they enjoy, some baby boomers are working well beyond the traditional retirement age of 65 or phasing into retirement over time. Increasing longevity and improving health outcomes also relate to this decision.

But these boomers aren’t necessarily working 40-hour weeks. Companies are growing more receptive to employees’ desires for flexible schedules, including three- or four-day work weeks or remote work. These arrangements free pre-retirees to spend time on travel, hobbies and other goals — and lead to enhanced productivity and job satisfaction.

Work-life balance is the key ingredient to happiness. According to John Wasik’s New York Times article “Facing Retirement, but Easing Your Way Out the Door,” many workers enjoy their reduced schedules so much that they’re extending the arrangements for years longer than they planned.

Figuring out what you want now

In his book “4 Hour Workweek,” author Tim Ferris argues that reduced workweeks are a growing trend for all workers, not just pre-retirees. Technology and the “Uberization” of the global economy allow workers to leverage overseas vendors and virtual assistants and focus on their “highest and best use” skills, in and out of the office. You don’t have to wait for that magical moment in time called retirement.

“Someday is a disease that will take your dreams to the grave with you,” Ferris writes. “Lifestyle Design is not interested in creating an excess of idle time, which is poison, but the positive use of free time, defined simply as doing what you want as opposed to what you feel obligated to do.”

My favorite parts of the book are the exercises that help you identify what you want to have, be and do within the next six to 12 months. These are similar to the questions I pose to clients when I first meet them. Younger clients often have no problem identifying 10 or more things they want to achieve before they die, but clients who are in their late 50s and older tend to have a harder time completing these exercises and may even focus on their kids’ needs instead of their own.

Here’s a sample of the questions Ferris uses to get people back in touch with the things that excite them and guide them through the goal identification process:

What are you good at?
What could you be best at?
What makes you happy?
What excites you?
What are you most proud of having accomplished in your life and how can you repeat this or develop it further?

Financial planners are life planners

Life planning creates the foundation for your financial plan. When I understand my clients’ goals, I can ensure that their money is allocated and prioritized to help them reach those goals. The financial plan then comes to life in a powerful way for clients. They can envision the future — whether it’s 12 months or 20 years from now.

Does your financial planner ask you questions like the ones above? Is he or she more interested in you or your money? Find a planner who provides holistic financial planning services and helps you start working through your bucket list. You don’t have to wait until retirement to start enjoying your time or your money.

Women and Retirement –Does Your Husband’s Decision to Retire Early Complicate Your Retirement Planning?

Retirement planning can be more complex for women for various reasons. Women live longer, take time away from work to care for their parents or children, and are often paid less than their male counterparts.

To compound matters further, many married men are deciding to retire much earlier than originally anticipated. A husband’s early retirement can have profound effects on a woman’s ability to fund her retirement throughout her lifetime. With careful planning, however, these issues can be successfully navigated to provide peace of mind that the couple will have adequate funds.

Many baby boomers are burnt out from working 20+ years in their careers and feel a burning desire to quit and travel the world. Many men and women are leaving their corporate jobs whether by choice or by design. Retiring in your 50s, may mean that your spouse will need funds to last 40 or more years. Unfortunately, women, due to their higher risk of longevity, bear the brunt of a husband’s desire to retire early. The wife may continue to work after their husband retires to provide additional income, and thus feels increased stress due to suddenly being the sole breadwinner. Ironically, she may feel as though she needs to retire later to offset the impact of her husband’s early retirement. Financially, a wife, especially if she has been the lower earner or worked fewer overall years than her husband, will also have lower Social Security spousal and survivor payments, if her husband chooses to take benefits early.

How can women improve planning around her husband’s desire to retire early?

Discuss any early retirement decision as a couple and ensure that you are both ready for other emotional, financial, and psychological change. Be supportive and see how you can make each other’s lives more enjoyable in the interim, to see if retirement can be delayed. It may mean that you take more time off or even phase into retirement over time. Most importantly, balance the short term benefits of leaving work with the long term tradeoffs.
Try to delay taking Social Security. If you are both healthy, you should try to delay claiming until at least your full retirement age. Work with a fee-only financial planner to determine the optimum strategy to maximize your lifetime income based on your age and life expectancy. You can go to livingtoo100.com to get an estimate of your life expectancy.
Create a life plan along with your financial plan. Determine how your lifestyle will change after retirement and make sure to share household responsibilities. Create an ideal day, week, month, year in retirement. Write it on paper. Create a Pinterest board or scrapbook of things you want to do or see in retirement.
Realize there are significant tradeoffs. Early retirement may mean that you can’t gift to the kids as much as you wanted or fund lavish travel plans. Discuss how that might affect your retirement satisfaction in the long run.
Maximize your pension payments through a “pension max” strategy. If you want to choose a pension benefit that provides maximum yearly income and a small survivor benefit, you need to ensure that your spouse is able to support his or her lifestyle should something happen to you. A “pension max” strategy using laddered insurance will be necessary to offset the impact of an early death of the person who receives the large pension.
Consider long term care insurance—this can ease the burden of taking care of a spouse and help protect assets so that the caregiver spouse can have sufficient funds for the balance of his or her life.

Retirement planning is far more complex than just your investment allocation and selection of funds.

The many moving parts of Social Security claiming strategies, pension strategies, budgeting, withdrawals, and planning for large expenditures all come into play. Work with a fee only financial planner to ensure that you are making appropriate decisions. A decision to take early benefits may reduce cash flow stress in the short term, but have longer term negative repercussions.

Sorting it all out with a map of your retirement landscape and how to navigate that map, can help you sleep better at night knowing that important decisions you make about retirement are sound.

Feb / 24

How to Get Ahead in Life

Americans strive to do “better than the Jones’” by earning enough money (and accumulating debt) to buy fancy McMansions, nice cars, and family vacations. But the never-ending pursuit of the trappings of wealth can get in the way of the truly important things in life such as relationships, job satisfaction, and extracurricular pursuits. Debt accumulation is often the end result of aspiring to acquire “stuff and things” so we can impress others and make ourselves feel like we have succeeded. Acquiring material possessions rarely leads to happiness. In addition to increased debt, it impairs our ability to provide adequate savings for retirement. In fact, research shows that the average American has very little saved for retirement.

According to research from the 2014 Retirement Confidence Survey (RCS) conducted by the Employee Benefit Research Institute, 58 percent of workers and 44 percent of retirees report having a problem with their level of debt, and a sizable percentage of workers have virtually no money in savings and investments. Among the workers that responded to the RCS, 60 percent report that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000. Only roughly 22% had savings over $100,000.

Mr. Anthony’s article offers some advice to live debt free and counterbalance the materialistic slant of today’s world.

First, he mentions a tip his father taught him– that he should always try to live on only half of what he earns each year.

Most Americans will need to save far more than they anticipated for retirement. Whereas a 10% savings rate was appropriate in the past when workers had robust pensions and could count on receiving Social Security, a retirement savings rate of at least 15% is now more appropriate. If you include additional annual saving for an auto reserve, future college expenses for your kids, and six months of cash for an emergency reserve, a number closer to at least 25% might be more practical. His father’s point was that you should try to live way below your means so that there would be a cushion of safety as well as turbo charged savings for future goals like retirement. If we live a frugal lifestyle, we won’t get too addicted to a cushy lifestyle.

Second, it is essential that we relax about what our “position” is in life and not fall prey to the belief that “we are what we own.”

The key concept here is that true happiness is “wanting what you have.” As we get older and start to reflect on our lives, we realize that health, relationships, and experiences are far more valuable than all of the physical things that were once so imperative for us to acquire. In fact, we have learned by experience, that just because we bought that truck or went on our dream vacation, it did not fundamentally change our lives. Learning to love exactly where you are in your life at any one point in time is a concept that will result in great joy, peace, and satisfaction. Mr. Anthony writes, “life does not consist of the abundance of things, but of the abundance of enjoying where we are and who we are with.”

Finally, Mr. Anthony suggests that we should not place an unrealistic burden on ourselves regarding where we “should be” at certain ages or stages of our lives.

You should live the life that YOU want, not the life you think your parents, friends, or colleagues think you should live. You have the power to write the script of your life.

Our life goals, and especially our retirement goals are very important, as they help define our lifestyle and determine how much money we need to achieve our heartfelt desires. If we can live by the principles that Mitch Anthony outlines, we can have control over our money as opposed to our money and debt having control over us.

If you want to read more about goal setting for retirement, I suggest that you read Mitch Anthony’s book The New Retirementality. It will inspire you to be more intentional about planning for that next phase of your life. The book also provides valuable exercises to help you determine how you will spend your time and money to live a purposeful retirement. The Millionaire Next Door is also a great read to inspire you to downscale your life. The book, written by Tom Stanley and William Danko, presents research on the habits and lifestyle of wealthy Americans and how they accumulated millions by not flaunting their wealth, but instead by living a practical life.

Nov / 07

Buying Only What You Need

Perhaps, the word minimalism has become part of modern life today. Starting from the things in your home, even become one of the current home models. Modern minimalism is one of the words that you often find if you open a magazine or website about real estate you often get the word.

Start To Live Simple Life

Talking about the word minimalist, actually lifestyle can be included in that category. This time I will share my own life experiences that might be suitable to be called a minimalist modern lifestyle.

For a long time I have thought about giving away everything I own and starting over. Complete liquidation of assets — the creation of a tabula rasa for a capitalist system.

Living by only buying what I need

Somehow, I think you don’t miss the little things when you have nothing at all. “Boy, I sure would like to listen to my The Get Up Kids CD. Oh wait, I don’t have any CD’s.”

My parents really need to take this mentality to their refrigerator. Just throw everything away, for chrissake — the dead fruits and vegetables, the forgotten jars of relish and preserves. Begin again from square one: “I would like to have eggs and orange juice for breakfast tomorrow. I will go out and buy eggs and orange juice.”

Next day: “I would like to have hamburgers for dinner. I will go to the store and buy meat and bread and cheese and ketchup.” Then the next time you want hamburgers, you already have ketchup. When that bottle runs out, you go buy a new one, as opposed to having two already open and barren bottles somewhere in the fridge that nobody wants to use, coupled with the brand new bottle that was bought in ignorance of the first two (please tell me everyone else’s parents do this too).

Imagine approaching your entire life like this — “I need a car to get to work. I will go buy a car. Oh wait, I need clothes to wear to work. I will go to the mall and buy clothes.” Granted, you spend a few days walking around town hungry and naked until everything falls into place, but isn’t that a small price to play for a lifestyle of minimal possessions?

Just think about it-no more dozens of unworn T-shirts cluttering up your drawers. No more stacks of unread books and magazines. If you need something it’s there waiting for you. Otherwise, well, what good was it doing you anyway?

When I figure out how to get people to buy all the crap I have accumulated in two decades, you all will be the first to know.

Nov / 04

Best Way for Couples to Prepare for Retirement – Talk it Out

It takes us years to build up our financial resources for retirement. We target a monetary goal for retirement and invest accordingly, but what about our vision of retirement? How do we make sure that we are on the same page with our spouse with regard to a common vision of our lifestyle in retirement?

A study by Fidelity investments indicated that approximately 4 out of 10 couples not yet retired are in disagreement about their lifestyle in retirement. One out of three disagreed about the overall vision of retirement.

Establishing Common Goals

Upon retiring, many individuals experience depression and a sense of loss. This can be overwhelming. Action-packed days are suddenly replaced with leisurely weeks with nothing on the schedule. Since we often derive our self-worth through our workplace accomplishments, we may experience a loss of identity. Engaging socially with work peers is suddenly replaced with extra time with our spouse. Conflicting goals between the two of you can result in additional stress and possibly harm your relationship. Establishing common goals is essential to a fulfilling relationship during the retirement years.

Vision of Retirement

It is important to discuss your vision of retirement as a couple years prior to your anticipated retirement date. Schedule time to discuss your ideas about retirement and make this an ongoing conversation. Be as specific as possible. It is okay to change this vision over time. Life is dynamic. Our hobbies, interests, and goals change with time. This conversation, will at least help set expectations for retirement, so that there are no surprises. You can both input and affect the ultimate decisions. If you disagree, that is okay. You can negotiate issues over time in order to come up with a suitable workable solution that is amenable to both of you.

If couples don’t have these types of conversations, they may be suddenly thrust into the “second act” of their lives with conflicting opinions – which will only harbor resentment.

One helpful way to get started is to map out what a typical day, week, and month looks like during retirement. Think about the following:

Will you both retire at the same time or stagger your retirement dates?
How much time will you allot to individual pursuits versus spending time together?
Will the two of you travel alone or will you schedule joint trips with friends?
How much time will spend with friends or hobbies and other activities that will not involve your partner?
Will you need “alone” time or time that is spent in solitude without your partner?
How active will you be? How much time will you devote to exercise, kids and grandkids, travel, friends, volunteer work?
Will you consolidate homes or keep the vacation home and commute between both?
Do you want to downsize your homes and free up cash for traveling and renting homes for a month at a time around the world?
Do you want to live close to kids?
How much support will you be providing to kids and grandkids?
How do you plan on taking care of your spouse should he or she need long term care? How will you fund this?

Fleshing this out will have the added benefit of assisting you in determining your expenses in retirement. You can also work with a financial planner to address these softer, qualitative issues regarding your retirement lifestyle. She can assist you in prioritizing goals as a couple as well as determining how it might impact your budget in retirement. Having a third party help you map out your future in a quantitative and qualitative fashion can be a valuable exercise.

The Result

Americans tend to procrastinate saving for the future and often avoid talking about the future. Planning for your retirement lifestyle will not only help motivate you to work hard to achieve your retirement goals – a clearer vision makes it seem more real – it will also result in improved harmony with your loved one.

May / 22

Do we have a retirement crisis on our hands?

Many studies show that Americans are woefully behind on their savings for retirement. In fact, according to the 2018 EBRI annual survey, roughly 60% of all workers surveyed have less than $25,000 saved for retirement. But things might not be as bad as they seem.

A recent study by risk management firm Towers Watson attempts to debunk the magnitude of the retirement crisis in America. The authors suggest that most retirees will be better off than predicted, since they don’t require as high a replacement ratio of preretirement income, as what is commonly recommended. They argue that the often quoted rule of thumb that retirees will need to fund 85% of pre-retirement income annually, may be too high. In reality, retirement cash flow needs change over time. As retirees age they move through the “go-go” years, the “slow-go” years, and then the “no-go” years. We spend far less than we anticipate at the end of our lifecycle, due to diminished mobility and health.

In addition, the savings cycle is variable. People will forgo savings early in their career, but ramp savings up substantially in the latter stage of their working years to make up for lost time.

I was recently asked to comment on the Towers Watson study by reporter Mandi Woodruff for an article in Yahoo Finance. My instant reaction to this story was that individual investors have to take these rule-of-thumb numbers with a grain of salt. The data on annual retirement savings is flawed (as the Towers Watson report points out). For example, it does not include the value of pensions, real estate, or closely held businesses. It also does not include the value of transfer payments and other governmental programs, so the resulting data set is incomplete. We cannot draw conclusions based solely on this data.

Gauging retirement readiness should be done on an individual basis. More importantly, as a financial planner who specializes in retirement planning, I know that simple tools or rules of thumb are crude at best. They are like applying blunt machetes in a surgical procedure. They are not going to result in the precision that is needed for each individual’s situation.

The best way to approach retirement planning is to work from the bottom up and determine the clients’ specific personal cash needs and requirements over the balance of their lives. Quick on line calculators and rules such as multiple of final income or spending as a ratio of income can’t possibly apply to everyone. These repeatedly quoted prescriptions for success insinuate that the planning process is static and deterministic, when in fact, it is a dynamic process based on many fluid assumptions and variables. The ever changing-nature of a client’s personal life, tax laws, financial markets, etc. require that the plan is periodically updated.

Instead of a rules based approach, each client should be evaluated in a highly customized and holistic way. That is the essence of true financial planning. It’s not just about investments anymore. It is about how a person will fulfill their dreams and what money can do for them during their lifetime. It is about career planning, lifestyle planning, legacy planning, tax planning, and cash flow planning. More importantly, it also encompasses the “x factor” of a client’s behavior towards and attitudes about money in his or her life.

While many in the field of finance are touting the trend and threat of robo-advisors, holistic retirement planning lends itself far more to the human touch. Since many Baby Boomers are entering the distribution phase of their financial life, customized financial planning is becoming more important than ever.

Proper financial planning starts with an in-depth conversation with a client to better understand what makes him or her tick. It requires listening, attentiveness, and is done best when there is an ongoing relationship with that client. It is not a one and done event.

A detailed retirement plan projection often requires the client answering the following questions:

What are you needs, wants, and bucket list items in retirement?
When would you like to retire and how will you phase into the new lifestyle? Will you still want to engage in part time work once you quit your job?
How will you spend your free time? What might a typical day look like?
How often will you be travelling and where will you go?
How often will you be connecting with friends and family?
Do you want to leave money to heirs or a favorite charity? How will gifts to kids and your charities change upon retirement?
How healthy are you and do you have a history of longevity in your family?
How much are you willing to save in order to achieve an early retirement? And conversely, how much are you willing to cut spending before and after retirement, in order to retire early?
What are your plans for your home? Will you relocate? Will you keep your second home? Will you need any major improvements done? Will you downsize?
How often will you buy cars and other vehicles? How much will you spend on each vehicle?

These questions not only help to determine annual and overall cash flow needs, they also can help assess behavior around money as well as risk tolerance.

I often use the metaphor of a jigsaw puzzle. Each client walks into my office and figuratively drops the pieces of their life puzzle on my table. Each puzzle picture is uniquely different. It is up to the client and me to put these pieces together to develop a vibrant picture of their future retirement years.

While I think these rules of thumb to assess retirement readiness are not adequate, there are some principles that are highly correlative to retirement readiness.

I suggest that if clients are serious about wealth-building they should save at least 15% of their salary throughout your career and that should limit wealth in personal real estate to no more than 25% of your total assets.

These principles encourage strong savings mentality, keep debt to a minimum, and reduce exposure to a low return asset class (personal real estate). Living below one’s means is a successful way to build wealth and a good lifelong habit. A strong savings rate helps protect against longevity and poor investment returns, as well as having to heavily tilt retirement savings to the back end of a career–which makes the investor more susceptible to market corrections in the years just prior to retirement.

Finally, the personalized, holistic approach to retirement planning addresses the significant challenges that savers have with regard to retirement planning. Having a planner that fully understands these risks and properly accounts for them will help the client feel more confident about his or her prospects for retirement. For example, if the planner assumes conservative investment return assumptions, accounts for higher healthcare cost inflation, adjusts Social Security benefits to account for some reform, assumes a relatively long life span, and the clients still have a high chance of success, they will feel more confident about their upcoming retirement. The peace of mind that is achieved through the financial planning process is something that a rule of thumb or quick on line calculator won’t necessarily provide.

While the savings statistics for Americans suggest significant shortfalls in retirement, working with a planner to determine how to maximize financial opportunities like Social Security and pension maximization, tax reduction strategies, and maximization of their human capital, is essential to preparing for a successful retirement. Ideally, the process is started as early as possible to improve a retiree’s chance of success and ensure that their unique vision of retirement is realized.

May / 01

Planning your expenditures this year? Don’t forget to plan for the future

As we start a new year, we start to think about our goals over the next 12 months. Will we take a vacation and, if so, where? What sort of activities or hobbies will we engage in or fund for our kids? If we have a big birthday or anniversary, how will we celebrate that event and how much will it cost? These shorter-term goals tend to initiate thoughts and discussions about long-term goals.

If we spend today, how will that affect our ability to fund college or retire? As we reflect on these issues, we may feel inadequate and unable to prioritize and quantify them. More often, those longer-term goals are pushed aside given the immediacy of the day-to-day obligations. The result is that we feel a mounting and nagging pressure that we are ignoring these longer-term goals at our own peril.

That is where financial planning can be a powerful tool. It allows us to balance the short-term needs and wants with important long-term objectives. It gives us perspective and enhances accountability. More importantly, the process provides peace of mind. People with a financial plan that addresses the various aspects of their lives tend to sleep better at night.

For example, say Dr. and Mrs. Jones spend heavily on their children’s activities and vacations each year. They also pay for their kids to attend a private school. However, they have very little set aside for college education, a small emergency cash position that may only cover 2 months expenses, and almost no investments outside of their 401Ks.

They are funding a great lifestyle through current income, but since they are in their 50s, they are concerned that they have not saved enough for retirement. They worry about how to fund medical expenses in retirement and if they will be able to maintain their lifestyle throughout both of their lives.

The financial planning process helps people like this by establishing a spending plan to balance their short-term wants with their ability to retire comfortably. It may mean they need to make tradeoffs by reducing current outlays in private school or family trips in order for them to save additional funds for college and retirement. Or it may mean that they need to work longer than anticipated. Furthermore, the process may address their need to help protect their earning power over the next 15 or so years by ensuring that they have the proper disability and life insurance.

An initial plan sets the course of their financial lifecycle and yearly progress reports, not unlike annual physicals, ensure that they remain financially fit.

Apr / 08

Save Smart for Retirement

Although many people want to retire comfortably, saving the funds needed to do so can be a challenge. Fortunately, there are some simple strategies that people can use to increase the odds that they will be able to save the money they need in order to retire.

Saving Is Important

Building a cushion of savings is important so that people have a safety net, and they also need these funds if they want to invest. By using some straightforward tips to save, they will hopefully have some added motivation to put more way.

Spend More Effectively

One way to increase the fraction of your income that goes into savings is to spend more effectively. People can make improvements by reviewing their expenses and identifying alternatives that are cheaper and are not substantially different. Once these items have been identified, people can use the extra funds generated to pay for things that are more important to them.

If an individual has more than one brokerage account, he can consolidate these accounts so that the higher level of assets provides them with services that are either cheaper or better.

Don’t Wait for the Perfect Plan

Many individuals fail to take action because they are holding out for the perfect plan. The drawback to this is that the longer they wait to improve their habits for spending and saving, the more money they will end up throwing away.

This principle also applies to investment plans, in that people fail to invest simply because they do not feel they have the perfect plan established. A lot of individuals do not invest because they are worried about making mistakes, but a plan is needed for retirement to be realized.

Continuous Refinement Is Key

Even if an individual has worked out a plan that he considers to be ideal for his situation, assets, goals and tolerance for risk, this plan can become outdated. Technological advancements provide individuals with more options over time, and new investment vehicles are always being created.

When possible, people who are saving for retirement should review their plans in order to see where improvement can be made. There are many investment mistakes that can be made, and people need discipline to ensure that their investment plans do not fall off track.

Savings are important, especially in the face of dwindling pensions and widespread concerns about the prospects for retiring. The doubts that many individuals have about their ability to retire were reflected in a recent Wells Fargo poll, in which 75 percent of respondents predicted that they would still be working during years that people usually use for retirement and an additional 25 percent said that they planned to retire no earlier than 80.

Could you retire in your 30s?

This article by Andrea Coombes for MarketWatch covers the story of a young couple who decided to retire early. No, they did not retire at 60, or 50, or even 40. They decided to quit work in their 30s. Their goal was to amass roughly 25 times their annual spending. They reasoned that if they could live simply and frugally, on roughly $25,000 a year, they could aggressively save enough to retire from their demanding jobs in the technology industry. This would allow them to both be active in raising their 8-year-old son.

Retirement is a math problem. How you live before and after retirement is part of the equation. If you can live on a very small budget, you can possibly retire early. One rule of thumb is to accumulate savings of roughly 25 times your living expenses. In their case, they paid off their home and reached the $600,000 target, so they decided to take the plunge. They now live primarily off their investment income and temporary jobs they take, as needed or as desired, for extra income.

This story underscores that in order for people to decide when they can retire, they need to know two things– how much they realistically need in terms of living expenses and how committed they are to saving aggressively to reach their goal.

It ultimately depends on your cash flow, which is the lifeblood of the financial plan. You need to enhance your awareness of what is coming in and what is going out. How much money do you really need to live on in a year’s time? How much of your salary are you saving? (My guess is that this couple was saving well over 25% of their gross salary annually.) How motivated are you to reach your retirement goal? Since this couple had visualized and articulated their plan to retire early they had a burning and shared desire to accomplish their goal.

Unfortunately, procrastination and a tendency to focus on current wants and needs as opposed to future plans can derail the best intentions.

Many workers think that as long as they save the maximum amount in their workplace retirement plan, it will be enough to provide sufficient income in retirement. But it really depends on their annual spending. For example, a professional couple spending $400,000 a year will have a hard time obtaining adequate income from a $2 million retirement plan once they retire. Remember, too, that a $2 million IRA or 401K is not totally available for income. You need to take the after tax amount into consideration. Two million dollars at a 32% tax rate (federal and state) would only be equivalent to $1.4 million.

Furthermore, in order to ensure that your funds will last you 30 years, you should probably only withdraw roughly 4% of the total, which would be $80,000 before taxes and roughly $55,000 after taxes. That is a large drop in income for someone who is used to spending several hundred thousand dollars a year.

Many of us will also need to save after tax dollars, as well as contribute to our retirement plans, in order to provide adequate income as well as flexibility regarding taxation of withdrawals in retirement. Since this couple retired so early with significant funds, it is likely the bulk of their savings was in after tax accounts. This helps minimize the tax impact of any withdrawals from their savings.

In the end, it all comes down to a trade-off between your lifestyle now and your lifestyle in retirement. If we delay gratification now, we can meet our future goals. If we want to live a simple lifestyle, it will likely be easier to retire early. If we have large spending needs in retirement, we will need to save more or retire later in life.

It will be interesting to see how this couple continues to navigate their frugal journey, especially as expenses rise over time. Their child will likely want to engage in sporting activities, hobbies, video games, and attend college. The future may also bring unexpected medical and long term care expenses.

Plus, there are definitely downsides to such an early retirement. I am not sure a life of leisure would be suitable for most young people, as achievement, socialization, and other benefits from working can be beneficial to one’s physical health and emotional well-being. Furthermore, if a worker remains out of the work force for even just a few years, his skills may become irrelevant, such that he becomes unemployable.

I admire the couple’s ability to save and reach their goal and wish them much success in their endeavor. I hope that in the long term their “hiatus” works for them. My guess is that this couple will eventually decide to go back to work. Saving for 10 to 15 years so that you can live possibly the next 70 years seems like a tough math problem to solve. But adhering to these principles can help us all manage our own retirement math a bit better.