06/29/15

How Older Americans Can Cut Student Debt

By Sharon Epperson   June 18, 2015 CNBC.com

Student loan debt is not only a financial burden facing millennials. It’s a big—and growing—problem for many older Americans who are near or in retirement. Student loan balances among borrowers in their 50s or older made up 17 percent—or about $204 billion—of the nearly $1.2 trillion in outstanding student loan debt in the U.S. last year, according to researchers at the New York Fed.

And while student loan balances have grown substantially for borrowers of all ages in the past decade, researchers say the fastest growth has been in total balances held by borrowers age 60 or older, which have increased nearly nine-fold since 2004.

“Student loan debt owed by older Americans includes debt borrowed or co-signed to help a child or grandchild pay for college as well as student loans for the borrower’s own education,” said Mark Kantrowitz, senior vice president and publisher of Edvisors.com, a college financial planning website. In financing their own education, “most of this debt is more recent…student loans borrowed when returning to college to finish an undergraduate degree, to switch to a new occupation or to obtain a graduate degree.”

Older borrowers are also more likely to have defaulted on loans (meaning they fell behind or failed to make payments), and many incorrectly believe their balances can be discharged in bankruptcy. “Student loans are cancelled when a borrower dies, not when the borrower retires,” reminds Kantrowitz. In the fourth quarter of 2014, the average student loan balance for all borrowers was $26,700. If you’re still carrying student loan debt as you approach retirement, here’s what you need to do:

Don’t default on your loan

Make your payments on time. If your loan goes into default, the government can garnish your wages, withhold your tax refund and even take a portion of your Social Security benefits. From 2002 through 2013, the number of Americans whose Social Security benefits were offset to pay student loan debt increased five-fold from about 31,000 to 155,000, according to the U.S. Government Accountability Office. Among those 65 and older, those whose benefits were offset grew from about 6,000 to about 36,000 over the same period. Student loan borrowers who graduate, don’t postpone payments, track their progress, and communicate with their servicer increase their chances of successful repayment, according to an analysis by Navient, a loan management and servicing company.

Explore income-driven repayment plans

If you qualify for an income-driven repayment plan, you can lower monthly payments on federal student loans, which may help keep you from going into default. You’ll make payments based on 10 to 20 percent of your discretionary income. Any remaining balances on your federal loans will be forgiven after 20 to 25 years as long as you’ve made your payments on time. Go to the U.S. Department of Education’s website to find out more about the three income-driven repayment plans (“Pay As You Earn”, income-based, and income-contingent) for federal student loans.

Stretching out the term of your loan as long as possible through extended payments or income-based repayment can help to reduce the monthly payment to a more affordable level and improve cash flow, though keep in mind that you could end up paying more in interest over the lifetime of the loan.

Consider consolidation or refinancing options

Parents who took out federal PLUS loans for a child or a grandchild may be eligible for income-contingent plans, if the loan is consolidated. But, unfortunately, private student loans—including loans parents co-signed for their kids—are not eligible for income-driven repayment plans. For those, try to negotiate a lower payment with the lender. Refinancing student loans may also help borrowers with excellent credit find lower interest rates.

“Refinancing all or some of those loans enables borrowers to receive a new loan at one interest rate that, depending on the borrower’s circumstances, tends to be lower than what they were paying previously,” said David Klein, CEO and co-founder of CommonBond, a startup student lending platform that refinances existing graduate student debt. “Many people just aren’t aware of the refinance options out there.”

Bottom line: Investigate all of your repayment options—and cut other expenses too—so you can get rid of that student loan debt before you retire.

02/23/15

What is Your Retirement Glide Path?

Bankrate.com, By Dr. Don Taylor , September 8, 2014

I first heard the term “retirement glide path” close to a decade ago at a retirement income workshop. At the time, I thought it was a colorful way to describe the changes in asset allocations in a target-date retirement fund.

Target date funds are mutual funds, and now exchange-traded funds (ETFs) too, that invest in a combination of stocks, bonds and cash equivalents. The asset mix changes as you approach the year or range of years in the fund’s name. In general, the asset allocations become more conservative, with the percentages of bonds and cash investments increasing and the stock allocation decreasing as you approach that target date. These funds have become the “go to” default investment for firms with 401(k) plans.

One of the issues with choosing the target date as the year you expect to retire is that you may have another 30 years of that portfolio being invested to meet your retirement income needs. Decreasing stock investments when you still have a multi-decade investment horizon may protect your portfolio from risk to principal, but it isn’t likely to help protect the purchasing power of that portfolio over time from inflation eroding that purchasing power.

An alternative to a target date fund is a target risk fund or ETF). With a target risk fund, the asset allocations are based on the investor’s risk tolerance. When you’re aging but your attitude towards risk isn’t changing, you can stay in the same target risk fund and the asset allocations won’t change. When you get to the point where you no longer are comfortable with the fund’s asset allocation mix, you switch funds.

Transitioning from an accumulation portfolio during your working career to a distribution portfolio in retirement, where you aren’t contributing to your retirement accounts is a transition point, but your retirement income needs will drive how the portfolio should be invested over time.

You’ll have a decision to make — whether you’re better off in one of these two types of funds/ETFs or with a custom asset allocation determined with the help of a financial professional. There’s not one right decision. That’s why they call it personal finance.

 To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

12/2/14

The Do’s and Don’ts of 401(k) Rollovers

When you switch to a new employer, make sure to transfer your retirement account the right way.

Most of the time, your 401(k) chugs along quietly, accumulating money and future benefits.

But when it’s time to think about transferring your account to a new employer plan, you face a dizzying array of questions and considerations. These do’s and don’ts will help you roll over your 401(k) without getting seasick.

Don’t get hung up on mastering the technicalities of this process, says Tom Rankin, business administration instructor for Wake Tech Community College in Raleigh, North Carolina. “Worry less about the exact rules, and focus more on knowing how to access and look up the rules,” he says. “Understand the laws, but don’t memorize them, because they’re always changing. It’s more important to know the key questions to ask when you take a new job and when you are changing your account.”

Do ask these basic but important questions of the new fund administrator, Rankin says:

  • What are the fee structures? Low fees typically translate to higher returns.
  • What is the employer match?

How can you consistently escalate your 401(k) contributions to achieve your goals? Consider diverting a portion of each raise to your 401(k) account, Rankin says. “Keep it simple, and keep it automatic,” he says.

Don’t forget to review your account to make sure you don’t have any outstanding loans or withdrawals you will have to pay back in full before you can accomplish the rollover. It’s easy to forget you are paying back a 401(k) loan if the repayment is automatically funneled from your paycheck, financial advisors say. Get in touch with the plan administrator and find out exactly what you need to do to restore the funds so the account qualifies for a rollover.

To avoid loans against your account in the future, do insulate your 401(k) from emergencies by first seeding, then regularly feeding, a rainy day fund, Rankin says. This ensures you won’t be tempted to borrow against your 401(k) for routine situations, such as paying for a new refrigerator. Even a couple of thousand dollars can provide the buffer you need to shield your 401(k) from temptation, he says.

Do integrate your 401(k) into your estate and disability plan, Rankin recommends. Your loved ones and heirs need to know how to access the account in case you are not able to manage it. Designate someone as the executor when you set up the new account. Don’t forget about prior spouses. As annoying as it may be, you may have to get a signature and releases from a former spouse to roll over your 401(k).

Don’t overlook the special circumstances of owning company stock, says Mike Piershale, president of Piershale Financial Group in Crystal Lake, Illinois. In some circumstances, you might be able to claim special tax breaks if you own company stock, and Internal Revenue Service rules will probably require you to sell the company stock in a certain way. Make sure to scope out the long-term capital gains implications before making a move, Piershale says. “This typically applies to people who’ve been at the same company for at least five years and typically much longer,” he says.

In fact, if you are rolling over the account because you are leaving a job you have had for a long time, take the time to review your portfolio diversification and your next stage of investing goals, Piershale adds.

Don’t assume you must take the money with you when you move to a new employer, says Lenny Sanicola, senior practice leader with WorldatWork, a benefits association based in Scottsdale, Arizona. “You don’t have to take it out,” he says. You may want to leave the account with your current employer’s fund in the following scenarios:

  • There is no 401(k) or equivalent plan at your new employer.
  • You are going to start a company or become self-employed.
  • You need to figure out how your retirement accounts mesh with those of your partner and where you may find efficiency.
  • You need to take time to review your retirement and investing plans, options and goals before redirecting the 401(k).

Take your time, Sanicola says, and don’t give in to your former employer’s promptings for closure. It’s much better to leave your 401(k) parked in a former employer’s plan than withdraw the money in a lump-sum distribution. That is the single biggest no-no, financial advisors agree. If you get a check for the funds, you will probably pay an early withdrawal penalty of as much as 10 percent, wiping out years of gains. The money will also probably be subject to regular income taxes, erasing even more gains. And the IRS will force your former employer to withhold 20 percent of the funds, which you can reclaim by filing special forms when you do your income tax return.

“Keep your hands off the money,” Sanicola says.

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

10/15/14

Capital from Self-Directed IRAs Flows to Real Estate

Wealth Mangement.com Oct 8, 2014Beth Mattson-Teig

Individuals with self-directed IRAs are adding to the abundant capital flowing into commercial real estate investments these days.

Self-directed IRAs account for just 3 to 5 percent of the broader $6.5 trillion IRA market. Yet even that small fraction amounts to big dollars at an estimated $195 billion to $325 billion, according to data from the Retirement Industry Trust Association (RITA) and the Investment Company Institute. And interest in self-directed retirement accounts is poised to rise further as more individuals look to gain greater control over their investment planning and diversify their portfolios beyond stocks, bonds and mutual funds.

“As workers stay longer in jobs with 401ks and accumulate assets in their 401ks, they are more likely to roll those assets over into a self-directed IRA at some point,” notes Mary L. Mohr, executive director of RITA. “I think that is really creating this huge pool of capital.”

One of the factors fueling interest in self-directed IRAs is that individuals are exhibiting a greater appetite for alternative assets such as real estate, precious metals, commodities, limited liability corporations and hedge funds. “Diversification is a big driving factor in why people want the different types of asset classes non-correlated to the stock market, and they can do that with a self-directed IRAs,” says Mohr.

“Alternative investing is really exploding,” agrees T. Scott McCartan, CEO of Millennium Trust Company in Oakbrook, Ill. Millennium Trust is one of the largest custodians of self-directed IRAs specializing in alternative asset custody and one of the largest providers of automatic rollover solutions. The company has seen explosive growth in the volume of self-directed IRA assets it administers, as well as in custody of private funds, growing from about $733 million in 2005 to just over $11 billion currently. As it relates to alternative asset investing, real estate is often a favored asset for many individuals. People have a desire to invest in things they know and understand, such as a four-plex residential properties or retail buildings that they can drive by every day, says Mohr. And people want to use money in their IRAs to buy those properties. “We see that real estate is the number one choice in terms of the types of assets that self-directed investors want to own,” she says.

Direct investment

The growing self-directed IRA market is an attractive target for real estate funds and sponsors searching for investment capital. “People are going to go where the money is,” says McCartan. For example, individuals with self-directed IRAs are firmly on the radar for real estate crowdfunding groups such as Fundrise and CrowdStreet.

Although individuals have the opportunity to use traditional IRAs and 401ks to invest in real estate via REIT stocks and real estate mutual funds, there is a greater desire to have access to direct real estate investment opportunities. “This is part of a bigger trend that we are seeing moving away from reliance on the stock market as your sole source of access to investments towards more of a decentralized approach,” says Darren Powderly, CCIM, co-founder of Portland-based CrowdStreet.

CrowdStreet’s typical investors are baby boomers with IRAs and 401ks who are looking to invest in income-producing real estate. What the crowdfunding platform does is give investors access to those real estate investment opportunities, as well as the potential to invest in smaller increments, such as $25,000 at a time. That incremental investment allows an individual to build ownership in a portfolio of real estate properties within their self-directed IRA.

“I think the experience of the downturn and the flash crash distrust of Wall Street has driven the American investor mindset that they don’t want to be so reliant on the public markets. They want to diversify beyond the stock market as their sole source of investment opportunities,” says Powderly. In addition, investors are feeling better educated and have more tools at their fingertips to make their own investing decisions, he adds.

One benefit to using a self-directed IRA to buy and sell real estate is that the capital gains taxes are deferred until the individual starts withdrawing funds—ideally, after the age of 59 and a half, when he or she can do so without also having to pay an early withdrawal penalty. The tax situation is even more favorable for those individuals who set up a self-directed Roth IRA, which allows them to avoid additional taxes on the back end when they start withdrawing funds. The downside to self-directed IRAs is that individuals are taking more risks and relying on their own judgment to make sound investment choices.

It remains to be seen how large the self-directed IRA niche will become as word spreads that individuals can use their IRAs to buy things other than stocks, bonds and mutual funds. However, self-directed IRAs will continue to be a bigger source of capital for alternative assets such as real estate. “There is more money in IRAs at an increasing rate than any other pockets of capital,” notes McCartan.

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

09/24/14

10 Ways to Retire on Less Money

These strategies will help your retirement savings last longer

By Tom Sightings, July 29, 2014 | US News and World Report

Retiring on 100 percent of your pre-retirement income may be an option for one percenters who leave work with golden parachutes, but it’s not realistic for the rest of us. Most of us will get by on a combination of some retirement savings in addition to Social Security and a pension if you still have one. Whether your nest egg is large or small, here are ten ways to make it last:

1. Pay off debt before you retire.The first thing to do is count up your assets and debts.  Hopefully, by the time you retire you have more assets than debts. You should no longer have student loans, and your mortgage might even be paid off. Now is not the time to take on new debt. If you have to float a big loan to buy a new car, it’s probably better to keep the old one and fix it up.

2. Downsize your housing. Once your kids are grown you don’t need three or four bedrooms anymore. A lot of retirees hang on to the old place in case the kids want to move back in. But this is a “what if,” while the expense of carrying a home is a certainty. If your budget is limited, then move to a smaller place in a less expensive neighborhood with lower taxes and smaller utility bills.

3. Get a part-time job. Many people choose to work in retirement because they need the money, a place to go in the morning or some new friends. Retirees are no longer concerned about a career, so they don’t need to stress out over promotions or workplace politics. Think of your retirement job like the summer job you had as a kid – have fun, make a few bucks and then go live your life.

4. Share your home. If you’re single, consider sharing a home with a friend or relative. Many older houses feature mother-in-law suites, and some newer construction offers two master bedrooms. Two can live cheaper than one, and this setup can offer companionship as well.

5. Rely on friends. Don’t be afraid to ask for a favor and then offer to reciprocate. You can save a lot of money driving each other to the airport or the store instead of calling a cab. Exchange yard work for housework or financial expertise for culinary skills. Don’t think you have to pay someone to do everything for you. Help each other out.

6. Search for free entertainment. If you want to cruise the Mediterranean, you may need 100 percent of your pre-retirement income. But most people don’t do that. Your community likely offers free summer concerts and fall festivals. Check out your library for free seminars, book clubs, movies and lectures. Your church, veteran’s association or social club can provide rewarding activities, all at little or now cost.

7. Eat out early in the day. We all like to splurge a bit and skip a turn in the kitchen. If you’re going out for a meal, go early in the day. Breakfast is cheaper than lunch. Lunch is cheaper than dinner. If you insist on dinner, go early for the senior citizen discount. Or consider trying a place that serves breakfast anytime. Eggs and sausage are definitely less expensive than steak and potatoes.

8. Stop subsidizing your kids’ lifestyles. The old saying goes: Give your children roots and wings. You’ve already given them roots. Now it’s time for wings. It doesn’t really help anyone to let them settle into their old bedroom. They need to find their own apartment, prepare their own meals and learn to live on their own.

9. Take advantage of discounts.  Take a trip to town hall and find out about real estate tax breaks and other senior citizen discounts.  Check out programs for free transportation, low-cost meals and subsidized health services.

10. Go international. Some people retire to the land of their grandparents, where they enjoy the support of family members. There are retirement enclaves in Mexico, Costa Rica and other Latin American countries. And a new trend points toward Asia and countries like Malaysia and Thailand, where the cost of living is low and people respect the elderly. Retiring overseas requires a lot of research, but it’s an option more budget-minded people are considering.

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

08/25/14

Retirement Reset: Sandwiched Boomers put plans on hold

It seems the very things that helped define the Baby Boom generation are also working against its efforts to retire. Boomers are free-spirited, independent and active. They married later in life and had children even later.

As a result, they find themselves taking care of their ailing parents at the same time many are still taking care of their children. For many, the strains on their resources are proving to be yet another reason to delay retirement — thus, the name the “sandwich generation.”

“People who want to retire have to delay that,” says Lanta Evans-Motte, financial adviser at Raymond James in Beltsville, Md. “This is during the time when they are at peak earnings and can put away the most money. But it’s also when a lot of them are having to turn around and spend a lot of money and time taking care of their parents, their children and in some cases, their grandchildren.”

A new study by the Pew Research Center says a record 57 million Americans (or 18% of the population) live in multigenerational households. While that research did not specifically address how many near-retirees are taking care of both parents and children, it’s clear the trend is increasing.

There are already enough pressures on Boomers hoping to retire. The average person has a retirement savings balance of $81,000, according to Fidelity. And 50% of people in a recent survey don’t expect to retire at 65. (Of those, 24% don’t expect to retire at 70.) But the new trend is straining resources even more.

“It’s so common, having both aging parents and having kids come back into the house, ” says Scott Hanson, principal with Hanson McClain Investment Advisors in Sacramento. “Costs go up when that happens, even if they don’t think they will.”

Katherine Dean, head of wealth planning at Wells Fargo Private Bank, says that potential retirees are being squeezed by two things: Young people who are struggling to get jobs, and parents who are living longer. The latest statistics from a National Endowment for Financial Education survey says 42% of people ages 18 to 29 are getting some kind of financial help from their parents. “Those two things are setting up a perfect storm,” she says.

Stories of the sandwich generation started with Boomer parents who, because they had children late in life, still had high school and college-age children at home when the health of their own parents started to deteriorate. That group has expanded greatly. Boomers are finding that even if their parents or children don’t live under the same roof, and even if their parents are in good health, they sometimes need financial support.

“Everyone wants to help their children,” Dean says. “If they have aging parents, they want to help them, too.”

Some tips from family and financial experts for dealing with the financial and psychological pressures.

1. Consider your own emotional and financial health. ”You can’t let aiding others destroy your own retirement and your own future,” Dean says. “You have to make those decisions in concert with your own goals. Beware of the emotional aspects. It can take a toll.”

“They have to understand the resources,” Evans-Motte says. “Can they really afford to do it? In some cases, they can afford it, but have to cut back on their discretionary spending. In other cases, they can’t afford to do it. Then you have to deal with the guilt part.”

“We work for the client,” says Ron Weiner, CEO of RDM Financial Group in Westport, Conn. “We don’t work for the children. We don’t work for the parents. Our job is to analyze everything going on and solve the rate of return they need, after taxes and inflation, to achieve all their stated goals.”

Make sure all the family members are on board, says Robert Fragasso, of Fragasso Financial Advisors in Pittsburgh. “Often, (taking care of a parent) falls on one of the children.”

2. Set ground rules and expectations. “If you have a child moving back in, let’s get it in writing,” Dean says. “How are you going to contribute to the household? Will you help out with chores? Will you get a job, even if it’s at McDonald’s or Target? Will you pay rent?

“What I’ve found is children really appreciate it because they are going through something difficult,” Dean says. “Setting boundaries and giving guidelines is great for both parties. It’s just difficult to do.”

Amy Goyer, AARP family and caregiving expert, says it’s also important to talk through the use of space. “The younger generation wants their privacy and wants to come and go as the please. The older generation feels the same, and the parents are in the middle. Space in one of the problems that cause most conflicts.”

3. Talk about finances: ”The talk about expenses and finances is often a sticky subject,” Goyer says. “With any family, that could be the case. It is often helpful to create a shared household budget and keep individual budgets separate. Be clear about who’s paying what: ‘I pay the mortgage, you pay for this, I buy food and you give me $100 a month.’ ”

“A lot of kids don’t know what things cost,” Dean says. “They’ve never had a budget. Have them create a budget. If they want this type of apartment or this kind of iPhone, create a budget so they know what they need to shoot for to make that a reality. There is still such a sense of entitlement. They need a little bit of a wake-up call.”

4. Update your financial plan. If you already have one, update it to include your new realities.

“They have to continuously update their own retirement calculations,” says Jim Stoops, vice president and financial consultant with Charles Schwab in Naperville, Ill. “Plans need to be revised once a year. Everything changes. You have to know where you stand for the next 12 months.”

“Get the right kind of financial investment advice,” Fragasso says. “Make sure the adviser knows elder care planning.”

“We can’t tell them you can or you can’t,” Weiner says.”It’s their money. We can point out that they are on a path to very difficult circumstances.”

6. Plan for the unexpected. It’s easy to plan for aging parents,” Hanson says. “The surprise comes when a child comes back, and often, it’s a failed marriage. The kids will come back in with a couple of their children. Those are a little more challenging.

“People need to be retirement-ready,” Hanson says. “They never know what will happen. Maybe the kids move back in with young ones. It’s important for people to think about all the things that might happen, down to what may derail our plans and plan around them. It’s not just how much … you save in your 401(k).”

“It’s a very prevalent, emotional, distressing issue,” Weiner says. “The human being seems to have an enormous propensity to make the wrong financial decision in emotional times. We all get frightened. We give up. We all feel children or parents should be our focus and we need to suffer. But by being smart, you can solve a lot of problems.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

08/18/14

Why You Should Prepare for the Next Bear Market Now – Develop a contingency plan for the next stock market dip while your investments are performing well.

By David Ning July 30, 2014 |

Avoid taking on too much risk just because your investments are performing well right now.

The stock market is going gangbusters these days, with the S&P 500 close to surpassing 2,000 points. As many people are celebrating their paper worth, I can’t help but remember a few short years ago when the S&P 500 dropped to the 600s. While the index may never fall back to that level, bear markets will one day hit us hard again. It’s a good idea to develop a plan for the next bear market now, while your asset values aren’t free falling and clouding your judgment. That way, you will be less tempted to make a permanent move that derails your solid retirement plan the next time the stock market takes a dive. Here are some of the sensational claims that could wreak havoc on your retirement plans if you buy into them during the next bear market:

Someone will claim that buy and hold is dead. Index investing is making many Wall Street brokers unhappy because every dollar invested in a low cost index fund is another dollar gone from the pool that pays them commissions. The next time the stock market dips, you will again hear how buy and hold is not going to work this time and that you need to time the market to be successful. Of course, you are always going to make a killing if you can accurately get out right before declines and get back in after the carnage. Unfortunately, those who succeed in getting out and back in are only the lucky few, while practically everybody else who tries ends up paying extra taxes and missing out on gains that follow. People who sold around 2009 didn’t get the full value of the recovery.

Financial pundits will say that this time is different. While they may be right that the reason for the big decline is slightly different each time around, don’t let anyone fool you into thinking that a drop in stock valuations is permanent. Unless there’s a catastrophe that permanently wipes out huge parts of the world, betting on the world stock market coming back to new highs is a very sure bet. Remember that stocks aren’t only pieces of paper people want in bull markets. Buying stock is buying the right to own a piece of the profits a company generates. If you buy an index, you are betting that at least some of the companies within the index will once again make higher profits, which has always happened because world economies have always bounced back. That’s why you should think very carefully if you sell after valuations go down, because doing so means you won’t be participating in the extremely high chance that valuations will once again march upwards. Stocks have endured the great depression, two World Wars, high inflation and all kinds of asset bubbles and still came out the best yielding asset class over the long term. What makes you think it won’t survive the next shock?

Everyone will tell you that you had too little in bonds. It’s always tempting to reduce your bond exposure in bull markets and increase it during bear markets, when you really should be doing the opposite. Remember in 2009 and 2010 after the big crash when just about everybody was saying that you needed more bonds? If you followed that advice, any dollar moved into bonds then saw a modest increase while stocks rallied hard for about five years and counting. Once you realize the stock market is crashing it is already too late to profitably shift your money to bonds because stock valuations are low. You are severely increasing the odds of buying high and selling low by moving to bonds after declines. The prudent asset allocation strategy may be the opposite. It might be painful to do, but selling bonds and buying stocks after equity values go way down actually increases the odds of outperformance.

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

04/7/14

How Side Income Helps You in Retirement

In addition to the financial security, side income often provides social and personal benefits for retirees.

 

By David Ning US News and World Report, March 19, 2014

Continuing to earn income is probably the last thing you want to do in retirement. But a freelance side business is a great way to spend time in retirement. There are many benefits of working in retirement, even if you don’t need the money:

Managing business activities keeps you active and engaged. It’s extremely easy to start sitting around once you are no longer forced to get out and about every day. Some people manage fine, but many retirees start to lose the spring in their step a few years into retirement. A side income can keep you feeling productive and energized throughout your golden years, which is good for your physical and mental health. At the very least, you will have an interesting response if someone asks you, “What do you do all day?”

Extra income can reduce anxiety. Even if the math says you have enough saved, the future is unpredictable. You may be spending so little relative to your assets that every retirement calculator says you’ll be fine throughout retirement, but it’s hard to imagine not feeling nervous if another crash like the great recession trashes portfolio values again. Obviously, side income won’t completely eliminate financial worries,but every dollar you bring in is going to make you more comfortable.

Save on taxes. A side business allows you to deduct many expenses on your tax return. The income you earn also gives you the ability to contribute money to tax-advantaged accounts, which will further reduce your tax bill either now or in retirement.

Keep your skills current. Continuing to work makes it much easier to jump back into the workforce if you get nervous about the market and believe you will need full-time income in the future. It’s not easy to find employment at an advanced age if you’ve been out of the workforce for years, but a resume entry about being the founder of a small business sounds much better. If your business takes off you may even be able to expand your side business to replace your former full-time income if you need to.

Beginning to earn a side income can be difficult, and generally involves planning, work, skill and luck. But the Internet has opened up a huge window to make at least a small side income. You’ve spent decades accumulating skills and experience. Leverage this to make a little extra cash in retirement.

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

02/3/14

How to retire early — 35 years early

Blogger who retired at 30 says it’s time to rethink spending

By Andrea Coombes, Market Watch, The Wall Street Journal, January 17, 2014

For many Americans, the idea of an early retirement is pure fantasy — many surveys suggest that a good portion of us are convinced we’ll never be able to retire at all. But what if retirement saving isn’t quite as insurmountable an obstacle as you think?

The idea that retirement — even early retirement — is within anyone’s grasp is a big part of the appeal of a popular personal-finance blog called “Mr. Money Mustache,” written by a 39-year-old man named Pete, who lives with his wife and 8-year-old son in Longmont, Colo. (The blog recently had 417,000 monthly unique visitors, and has had a total of 4 million unique visitors since it launched in April 2011.)

Pete, who prefers not to divulge his last name to protect his family’s privacy, retired when he was just 30. His wife retired with him, and for the past nine years they’ve been stay-at-home parents. Their investment income supports their lifestyle, but they also work when they want, on their own terms.

One secret to their success? They live on very little for a family of three: about $25,000 a year. They own a car, but mostly bike. Dining out is an occasional luxury. And shopping for stuff? That’s best avoided. But their philosophy goes beyond mere scrimping, says Mr. Money Mustache. It’s about enjoying life with less.

MarketWatch asked Mr. Money Mustache about his philosophy on spending, how he retired early, and his take on retirement planning. Our Q&A is below. And if you’re wondering about the name?

“Mr. Money Mustache is meant to be a bit of a character — a financial superhero,” Pete said. “He’s me, but a slightly bossier and more opinionated version of me. I find that people gladly obey the commandments of Mr. Money Mustache, even while they would scoff if plain old Pete, the former software engineer, stepped up and started giving them advice.”

How old were you when you decided to try to retire early, and how long did it take you to get to the point where you could retire?

It was a gradual process. I brought some frugal instincts along with me from childhood, so I always tended to save a bit of money rather than spending it all. My wife has been a pretty reasonable spender since the time we met, as well. So I graduated from college in 1997, we eventually moved in together, and, after several years of full-time work, some cash was starting to build up in our investment accounts, and we wondered if there was something useful we could do with it.

Sometime around 2002, we decided we wanted to be parents eventually, and that it would be great if we could retire from our relatively demanding careers in the tech industry before any babies came along. This really increased our motivation to spend less and invest more, and we cranked things up. At the end of 2005, our savings were sufficient to generate passive income that we could theoretically live off forever, so we quit the regular jobs and have been winging it ever since. And we now have an amazing 8-year-old-boy.

How did you decide how much money was enough to retire?

Based on a long-lasting hobby of reading books on stock investing, I realized that you can generally count on your nest egg to deliver a 4% return over most of a lifetime, with a good chance of it never running out. In other words, you need about 25 times your annual spending to retire. So we tracked our spending and our net worth, and when we hit the magic number we declared ourselves “retired.”

For more on Mr. Money Mustache’s take on the 4% rule here, read this blog post.

Did you have a written retirement plan in place early on, or more of a ballpark figure you were trying to save up?

We did most of the saving before we knew all that much about early retirement. But once the picture became a bit clearer, we had a clearer goal. For the last few years, the mantra was “$600,000 in investments, plus a paid-off house.” This is enough to generate $24,000 of spending money, which goes quite far if you have no rent or mortgage to pay.

How important is it for people to have a written retirement plan, in your opinion?

It doesn’t matter to me if it’s written, verbal or mental. But I do encourage people to open their minds to how real and possible an early retirement can be. It isn’t a vague, fluffy concept like, “someday,” “never” or “when I’m 65.” Retirement (or financial independence) simply means that you have your living expenses covered by nonwork income. In the worst case, this requires 25 to 30 times your annual spending, socked away into investments. If you’re eligible for a pension or Social Security, it’s even easier.

For more on how Mr. Money Mustache invests (hint: he’s a fan of low-cost, broad-based stock index funds), read this blog post. 

Do you work with a financial planner or manage your finances on your own?

I have always enjoyed managing my own finances. On the blog, I maintain a good-natured battle with the financial-planning industry in general, because they focus too much on retiring at a very old age with many millions in savings — just so you can continue to spend $100,000 a year until you die. It is much more efficient to get a handle on your materialism and spending so you can live more happily on a fraction of that amount, which can shave 20 years or more from the time you need to keep commuting in to that office.

How crucial is it, in your opinion, for people to have a monthly or annual spending plan or budget?

This really depends on your personality type. I’ve never had a spending plan or a budget at any point in my own life. Instead, it was a simple set of values to apply just before I make any purchase or commit to any expense: “Is this the best possible use for this chunk of money, if my goal is creating lifelong happiness for myself?”

Since I valued freedom and financial strength, this automatically ruled out quite a few purchases. For example, as a young man I was a major car enthusiast. But I didn’t run out to borrow money to buy an Acura NSX, because I valued having that money for other things more than I valued a fancy car. Nowadays I can finally afford a car like that without even borrowing, but I am happy to discover that the desire has disappeared.

See this Mr. Money Mustache article for details on the family’s spending in 2013.  

Some people might think so much cost-cutting is akin to living like Scrooge and not having any fun. How would you respond to that?

If you tell yourself that is how it will be, then you will create your own truth and life will not be fun. But if you understand the fundamentals of what it means to be a happy person, you realize that buying more stuff for yourself has no relationship at all to how happy you are. These fundamentals include things like close relationships with other people, health, rewarding work, a chance to be creative and help others.

Work on those things and you’ll start living a much better life immediately, and soon wonder where the odd compulsion to own a yacht with a submarine came from in your old self.

Surveys suggest there are a lot of people out there who are worried about retiring, who don’t have enough money saved, who feel like they may never retire. Can you offer people in that situation any words of advice in terms of how to turn their situation around?

The quickest way to turn things around is to realize that you are in much more control than you realize. The time to reach retirement depends on only one thing: your savings rate as a percentage of your take-home pay. And this depends entirely on how much you spend. So the moment you can learn to live a less expensive life, suddenly the clouds clear up and the financial picture brightens considerably.

Read Mr. Money Mustache’s 5 most important strategies for planning an early retirement. 

What would you say to someone in his 50s or 60s who maybe doesn’t have any credit-card debt, but is paying a mortgage and has about $100,000 saved for retirement? Is there any scenario where that person would be able to retire in, say, his early 60s?

That’s not a great starting point, but the turnaround can be incredibly fast once you realize where your money has been leaking out and change your life so that you can save much more of your income. Ten to 15 years is plenty of time for most people to go from zero to financial independence, so with a $100,000 head start and the kids all out of the house, this 55-year-old might be in a good place. Adding in Social Security income, the time to retirement would be even faster.

Do you think that the rule of thumb of needing about 85% of pre-retirement income in retirement is accurate, useful, dangerous, innocuous?

This is a good guideline for people who currently spend almost everything they earn, and plan to continue that habit in retirement. But for the rest of us, it is ridiculous!

A much more useful idea is to separate the idea of income from that of spending. Your income is determined by what you do for a living. But your spending should be decided based on your needs — the things and experiences that truly make you happy. As an example, my family’s needs and wants have always ended up adding to about $25,000 a year. So that’s how much we spent, whether we were making $25,000 or $200,000.

So as soon as our retirement income safely exceeded $25,000 a year, we were financially independent and we decided to retire.

I hate to get morbid, but the idea of how long one is going to live is sort of a crucial piece to a retirement plan. How are you handling this impossible-to-answer-yet-essential question? Are annuities and/or long-term-care insurance part of your long-term financial plan?

If you plan your retirement right, your expected longevity might actually have nothing to do with your planning. This is because the amount of money required to fund a 30-year retirement is almost identical to the amount to fund a person forever — an odd behavior of the equation for amortization of a large sum of money.

I’m not into annuities or any type of insurance myself, although those products do have value for some. Both of those ideas are based on statistics and probabilities, and when you do the math you can actually be safer handling things yourself. With a big enough collection of income-producing assets (stocks, rental property, etc.), your savings will easily outlive you, and probably be much larger by the time you die. This big chunk of savings also allows you to pay for unexpected expenses without rocking the boat too much — you have many years to adjust if you do hit a bump that forces you to deplete part of it for something like a medical expense.

You have said in the past that it’s important to “make your dollars work for you.” Does that mean the idea of an emergency savings account at the bank is overrated? Should people be investing more of their savings in the financial markets, via a taxable account, rather than using bank accounts?

Yeah, I’ve always questioned the idea of an emergency fund. It’s a great tool for the financial beginner who lives from paycheck to paycheck, and for whom a broken water heater would make the difference between making ends meet and borrowing via a credit card. But once you get off the ground, your credit card is a monthly buffer and your investment accounts are the emergency fund.

So I have no savings account at all, and keep just a few thousand dollars in the checking account. If a huge unexpected expense ever came up that was greater than my income, I would put it on the credit card along with all other monthly spending. Then just sell some shares of an index fund and transfer that back to the bank before the credit-card automatic payment happened at the end of the month. And I’ve still never had to run a credit-card balance in my life.

The great part is that if your spending is much lower than your income, these emergencies become very rare, because there is always a surplus, which you have to sweep away into investments each month. So if the water heater dies, you buy a new one and just invest a little bit less that month.

To what degree would you say rental income was key to your ability to retire early?

A small degree — I haven’t had the most brilliant landlord career so far, so my results have been only average. But rental properties chosen wisely can return much more than stocks, which could really speed up a savvy person’s retirement program. In my own case, I probably saved only about one year of work by using rental houses along with stocks.

Would you say it’s better to use extra savings to pay down one’s mortgage, or to invest in the financial markets?

For people in a high tax bracket, 401(k) plans in low-fee index funds win this battle pretty easily, especially if there is an employer match. For investment in taxable nonretirement accounts, it all depends on the interest rate (and if you’re pretty well-versed in investing, the stock market’s valuation or P/E 10 ratio).

Right now, with stocks expensive and interest rates interest rates interest rates very low, it’s probably a somewhat uninspiring tie, in my opinion, and you could do either. But if mortgage interest rates were 6% or more, I’d start getting more excited about paying off a house.

For people with other debts, like student loans, car loans or credit-card debt, at higher rates, I’d prioritize debt payoff even more.

It sounds as though a lot of your success has to do with cutting costs. But I know that some of my readers are really tired of hearing the “cut out the lattes” idea. What would you say to those readers?

For most people, cutting costs is by far the most powerful way to increase wealth. This is because it is easy to burn off almost any amount of money — just ask the 78% of NFL players that have financial problems shortly after turning off the cash fire hose of a pro sports career. It is also possible to cut almost any budget in half, leaving the happy latte cutter saving 50% or more of her income.

But the key to making this work is not cutting out treats — it’s eliminating your desire for those treats in the first place. Driving my 2005 Scion hatchback would be a chore if I had a desire for a 2014 BMW. But since this little Scion is more than enough car for all of my wants (and I usually ride a bike anyway), I am actually winning and living a happier life even while saving $20,000 a year in depreciation and other costs. The handy part of all this is that anyone can eliminate the desire for any of the expensive luxuries currently dominating most of our spending.

Do you have any sorts of items you love to buy and won’t give up?

That’s a tricky question, because our lifestyle does include quite a few luxuries that are fun to have around. I enjoy nice coffee at breakfast and wine many nights at dinner, and the food we eat is very high-end these days. And we live in a pretty fancy house full of nice stuff and take a lot of trips. While I enjoy all of these things, I also make fun of myself for living such a decadent lifestyle, as a reminder that none of these things are essential components of happiness. I would give them up in a heartbeat if we couldn’t afford them — for example if we were in debt or if they compromised our ability to live a free life. But since life is an adventure and there is no need to seek perfection, we dabble in all of the normal treats of American life.

When it comes to spending, what about travel to foreign lands? A no-no because of the steep expense?

Travel can be as expensive or as inexpensive as you choose to make it. We do quite a bit of it these days, spending every summer in Canada and a good part of last winter in Hawaii, with other trips to quite a few other countries in recent years as well. But if you live like a local once you get there, going for the slow and authentic experience rather than flashy hotels and bungee jumping every day, it costs a lot less. One of my favorite trips was a winter driving trip from Colorado down to the Gulf Coast, where we brought along a tent and a kayak and hung out on as many beaches and waterways as we could find in the tropical belt of Texas for a month.

Why did you start your blog?

It was a 50/50 mix of inspiration and exasperation. My wife and I retired from real work at the end of 2005, but all of our friends and peers kept working around us. As their careers blossomed and earnings grew, I kept hearing these complaints about money being tight and retirement being an impossibility. But looking at their lifestyles, I could see exactly where the money was leaking out unproductively — even while they seemed to be missing it. So I decided to start the blog and share the ideas with the world, rather than annoying friends with unrequested financial advice.

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

01/21/14

Working in – and through – retirement

Staying on the job has financial, as well as personal, benefits

 

Jan. 17, 2014, Written by JIM SANDAGER, at desmoinesregister.com

Working in retirement may sound like a drag, but to many, it’s a welcome opportunity to continue earning an income. But you shouldn’t only consider the financial benefits. Having a job in retirement can also add to your overall health, happiness and well-being.

First, though, let’s talk about money. If you take Social Security between 62 and your full retirement age (66 and over for people born through 1954), some of your benefits will be withheld if you earn above a certain amount. If you take Social Security at full retirement age, you can continue to work and get your full Social Security payment.

One of the main benefits of working in retirement is the opportunity to delay taking Social Security until you are past full retirement age, which increases your monthly benefit by 8 percent for every year past 66; put off payments until 70 and your monthly amount may be significantly higher than what you would get at 66.

Working gives you income that’s immune to the vagaries of the market, and it may delay when you start to spend down your savings. That’s important because people are living longer, and therefore have the potential to outlive their savings. One in four of today’s 65 year olds will live past 90, and one in 10 will live past 95, according to the Social Security Administration.

Now, the non-money benefits of working in retirement.

Working provides a daily routine, socialization and purpose to life that offset the boredom that some people feel in retirement. Studies show that those who work throughout these years have fewer major diseases and disabilities. There’s also a dramatic increase in the likelihood that you’ll live longer.

Working through retirement also gets you away from the house. Psychologists are increasingly interested in how living parallel lives with your spouse as you age (rather than being “joined at the hip”) leads to sharper minds, more interesting lives and happier marriages.

Continuing to work lets you ease into retirement, rather than making a psychologically difficult break in your life. As people stay healthier longer, there’s nothing magical about turning 65. Or 66. Or 70. At some point you’ll be too old to continue working, but why not find out for yourself when that is; why not stop working gradually, on your own terms?

You won’t be alone. The number of working Americans over 65 has doubled in the past 15 years; the percentage still working has gone from 12.1 in 1995 to 18.5 in 2012. The media are increasingly filled with stories of people who are working well into traditional retirement years. Yes, for many it’s because they haven’t saved enough to retire, or because the Great Recession wiped out what they had saved. But for millions of others it’s because they want to, because work is an essential part of their lives, and they’re not willing to stop living it.

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®