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It’s a fact that
we’re all living longer.
What is more amazing
is to think that in the 18th Century,
the infant mortality rate was estimated at only
43 percent during the first three years of life.
Today, according to the National Center for Health
Statistics, men are expected to live until 76.9
years of age, while females might live, on the
average, 79.5 years.
While living longer
means you’re going to be around for a long time,
it doesn’t guarantee quality of life. Putting
illness aside, even the healthiest of human beings
can’t live a modest lifestyle if money isn’t going
very far. Will the dollar you earn today go as
far as it does 10, 20 or even 30 years from today?
Consider this: at a modest three percent inflation
per year, the $50,000 you think you have to live
on will be worth $48,500 next year, $36,871 in
10 years and just $27,189 in 20!
So, just how much
does it take to retire, and can
you retire early? You bet – with some careful
planning and advice.
Annuity Payments
vs. Lump Sum
Let’s assume you’re
employed by an organization with whom you earn
a regular paycheck. If self-employed, some of
these observations may not apply, although the
concepts still are just as meaningful. When you
signed on with your company, you also signed something
in your paperwork that asked, upon retirement,
whether you wanted your accumulated pension all
in one check or monthly payments. While many financial
professionals’ opinions differ, there is a consensus
that taking a lump sum is preferred should you
need a great deal of money at one time. While
annuity payments serve as regular, steady income,
you could have a catastrophic need requiring a
large up-front payment.
Ensure your pension
plan deposits the lump sum directly into an IRA,
or you’ll face a 20 percent withholding tax liability.
And, if you do take the lump sum, make sure it
does not cut off the company’s entire retirement
plan benefits, including any health insurance.
If you opt for
monthly payments, check out the options, such
as taking higher payments now and having payments
end upon death, or taking smaller payments now
and having payments continue to your surviving
spouse after your death.
We’ve always been
told that you theoretically can’t touch any retirement
monies until age 59 ½ without paying a 10 percent
penalty plus tax. However, this isn’t true in
all cases, because you can withdraw some of it
upon disability or to pay certain medical expenses,
and can even use it to buy a home or finance a
family member’s education.
In addition, you
can set up withdraws that function as annuity
payments by using IRS Rule 72T. Committing to
this program for a minimum of five years, the
payments are based on life expectancy and total
amount, but under the right circumstances, you
actually could take regular sums of money, each
month for five years, without incurring any penalty,
as long as you committed to doing it regularly
for five years. A tax liability would be incurred,
but you would essentially have created your own
annuity.
Social Security
Based on today’s
Social Security, if you retire too early you’ll
miss out on important benefits. Because Social
Security payments are based on the average of
your best 35 years of work (adjusted for inflation),
if you retire too soon some of those years will
be computed as zeros. For example, if you started
working at age 22, you won’t have 35 years of
earnings until you’re 57, so retiring early can
displace average income. If you earned an annual
average of $60,000 over your best 35 years, your
benefit will be computed on that $60,000. If you
only worked 30 years, and want to retire early,
your benefit will be computed as the average of
those 30 years at $60,000 plus another five years
at $0, bringing your 35-year average down to just
over $54,000.
Mortgage Considerations
Early retirees
usually want to know whether to pay off the mortgage.
Of course, any interest you pay on your mortgage
is tax deductible at your regular income tax bracket,
so it’s probably best to pay off auto loans or
credit cards first. If there is enough money to
still cover the payoff on the mortgage, compare
the after-tax cost of the debt with how much you
recoup on investments. For example if a portfolio
averages an 11 percent return, and your mortgage
interest is at eight percent before your tax deduction,
it makes sense to leave the money in the market
and continue paying the mortgage. However – one
note. If you only have five years left on a 30-year
note, most of your payment is applying to your
principal, which means you have no deductible
interest.
Other Thoughts
There may be hundreds
if not more other considerations for retirement
based on your lifestyle, income level and longevity.
If you want to play golf 24/7, green fees can
be exorbitant depending on where you play and
which club you belong – which also carries a hefty
fee.
What about car
repairs or a new car to replace your 10-year-old
clunker? Can you afford repairs or even monthly
payments? How about where you intend to live …
today’s chic retirement communities boast joiners’
fees that may be the same as your son or daughter’s
last annual college tuition.
Many considerations
… and many decisions. The best approach is to
keep a level head, develop a retirement plan that
touches on these observations and consult your
accountant for his or her opinion. This is the
right time to do it. Don’t wait until the end
of the year. Meet – at the latest – in November
to ensure you are taking advantage of all current-year
tax saving and deductions. You can then put changes
in place that will ease you into retirement –
and may just enable you to retire years before
your parents did. Now that’s an opportunity! Call
us today to schedule an appointment to talk about
what keeps you awake at night. We have solutions!
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