Traditional IRA and Roth IRA

Planning for an early retirement is different than planning for retirement at 65. Obviously the money will have to last much longer but what are the other important financial issues for early retirees?

Investment strategy – Your investments need to be more conservative than what is typical for your age group. While aggressive investing might make more money in the long run, you can’t afford those short term dips. Aggressive investors planning on retiring at 65 can wait a few years for the market to come back but if you want to retire in a few years you need your money accumulating a steady rate with little risk of losing a large percentage of your capital. Early retiree bloggers recommend going with conservative dividend-paying stocks using lower risk asset allocation strategies like the “permanent portfolio.”

Use of retirement savings – A good portion of your savings might be tied up until you’re 59 ½. Retirement plans weren’t designed for people retiring at 35. You should still contribute to your 401(k) though because they accumulate tax free and when you are eligible to tap into them you will be in a lower tax bracket. Early retirement experts do say that if you want to make withdrawals from your retirement accounts but want to minimize the cost, you can start converting your pre-tax accounts to Roth IRAs once you stop working. There is a tax on the conversion but by spacing the conversions out over time, you can keep the tax rates low. After 5 years, you can start withdrawing the converted amounts from your Roth IRA without tax or penalty.

Social Security Payment – Early retirees really can’t count much on Social Security. Because the length of time you work and contribute to Social Security is shorter than those who work until retirement age, your benefits will be less.

Health Insurance = It will be quite awhile until Medicare kicks in and until then you will have to provide your own health insurance. If you have pre=existing medical conditions you will still be able to get insurance because of the new health care laws. Also, with your lower post retirement income you may be eligible for a premium subsidy. To learn more about options for health insurance for early retirees see our post Health Insurance for Early Retirees

Managing Your Nest Egg - Your money will need to last much longer than normal retirees. The typical retirement calculations will not be appropriate for you since you will spend many more years in retirement. Annuities will be less attractive too because your young age and long life expectancy mean much lower payments. Your nest egg will have to grow more than you withdraw each year to minimize the need to touch your principal. Early retirement bloggers suggest investing in high-dividend paying stocks yielding 3-4% income and live off the dividend income. Dividends tend to be much more stable than stock prices and generally rise faster than inflation.

One thing that people often forget is that retirement income under some plans is fixed and inflation can eat away at a fixed income. If the past is any indication, inflation will be a factor you will have to face.

As you can see retiring at 30 requires a very different investment strategy than retiring at 65. Early retirees must also plan for their health insurance coverage. One thing all retirement advisers agree on is planning is the key. Do your research, be aware of all the factors and plan accordingly.

Early Retirement Blogs

One of major challenges for early retirees is figuring out how to get enough money saved to meet their living expenses before they become eligible for retirement plan distributions and Social Security checks.

The government says you have to be at least 62 to begin collecting Social Security. In most cases you can’t take money out of your 401(k) and other retirement accounts until age 59½ without incurring a penalty.

There are a few exceptions. The Internal Revenue Service will waive the 10 percent penalty for early 401(k) withdrawals if you “separated from service,” or leave your job during or after the calendar year in which you turn 55.

Also, the penalty is also waived if you agree to make withdrawals of substantially equal payments after you leave your job. These withdrawals must be made at least once a year. Except in cases of death or disability, the payments under this exception must continue for at least five years or until the retirement account owner reaches age 59½, whichever is longer.

Most retirement experts do not advise taking money from your retirement accounts. You get a kind of double penalty when you do this. Your retirement savings won’t be as much when you retire and the money you take out can not continue to earn interest.

Additionally, most retirement blogs warn you away from using social security before your full retirement age because you receive a permanently reduced benefit. For example, if you were born between 1943 and 1954, for example, your full retirement age is 66. You would receive 75 percent of your full benefit if you start collecting those checks at age 62.

So you must use money from other sources to pay for living expenses before your retirement benefits kick in. One early retirement blogger calling himself Mr. Money Mustache says it is very simple to figure out how to get your money for living expenses. He says figure your savings rate, as a percentage of your take-home pay.

For example, if you save a reasonable percentage of your take-home pay, like 50%, and live on the remaining 50%, you’ll be ready to
retire in about 16 years. This assumes you can earn 5% investment returns after inflation during your saving years and you will live off the ”4% safe withdrawal rate” after retirement.

The interesting point he makes is that cutting your expenses is much more effective in boosting your savings than increasing your income. Again you are looking a kind of double reaction. My Money Mustache says “It increases the amount of money you have left over to save each month and it permanently decreases the amount you’ll need every month for the rest of your life.”

In other words learning to live frugally is really the key to being able to retire early. Getting a handle on your spending is crucial. It is really a psychological issue much more than being disciplined about savings. You have to see your refraining from spending as a path to financial freedom. You don’t want to spend so little you feel deprived but you want to find a happy medium that you can live with.

Health insurance is a big issue too for early retirees. We have done a lot research on what is available. See our postCOBRA for Early Retirees

Best Way to Retire Early

If you or a member of your family has a “pre-existing condition”, consider COBRA and when COBRA runs out HIPPA makes sure you can find insurance.

COBRA lets you keep your benefits for 18 months if you pay the cost. Your employer may charge you 102% of his total health premium cost. (The extra 2% covers administrative costs.) So if the coverage you had cost your employer $200 per month, you could extend that coverage for 18 months at a cost of $204 per month. .

After COBRA runs out the Health Insurance Portability and Accountability Act of 1996 (commonly known as the Kennedy-Kasenbaum bill) lets you get an individual (i.e., non-Group) health insurance policy for yourself and your dependents without restrictions on “pre-existing conditions.”

NOTE: To qualify for Kennedy-Kasenbaum coverage, you can’t have any gaps in your health insurance. Make sure you pay your health premiums on time. If you have a break in your coverage of 63 days or longer, it makes you ineligible. The 63 day period also applies between the end of your COBRA coverage and the start of your individual coverage.

While Congress has guaranteed you can get insurance, it hasn’t mandated what you should pay for it. The Kennedy-Kasenbaum bill allowed the states some leeway in implementing the legislation. If a state legislature couldn’t agree on how to provide coverage, the Kennedy-Kasenbaum law provides a “Federal fallback” position

States that have taken a position on the issue fall into three camps: “high-risk pools,” “guaranteed issue” insurance, and “Federal fallback.”

The “high risk pools” place people with pre-existing conditions in a separate, often state subsidized pool. The premiums are high as much as 50% to 200% higher than insurance for “regular” people and the coverage may be less.

Several states, many in the Northeast, have “guaranteed issue” laws that require insurers in the individual market to offer coverage regardless of a person’s health. The individual insurance rates in these states are often higher to absorb the cost of people with pre-existing conditions.

The “Federal fallback” position requires that insurers in a state offer people exhausting their COBRA benefits the choice of the two most popular health insurance policies offered by that insurer.

Call the State Insurance Commissioner’s office to find out how your state or other states you might want to move to are implementing the Kennedy-Kasenbaum law.

Best Way to Retire Early

Even if you’ve done the math and the answer points to you retiring early, health insurance is the one thing that could stop you cold. Even those not planning to retire early can have problems getting reasonably priced health insurance.

If you have never had to provide your own health insurance you are in for some “sticker” shock. That’s because most employers subsidize the cost of health insurance. For example, it typically costs between $200-300 per month for comprehensive health insurance for a single person. An employer might charge workers $30-40 per month for the coverage, absorbing the balance of the cost.

Some retirement blogs say to take the money you would spend for premiums and set it aside for your health care expenses. Retirement experts say though this is not a financially sound idea. If you self insure, you end up buying your health care at retail prices and you might need as much as $100,000 or more as a reserve for medical expenses. Self insuring exposes your retirement nest egg to too much risk.

So what is the best option?

Take the COBRA – Under Federal law, when you leave a company you are allowed to continue your employer provided health benefits (medical and dental) for 18 months if you pay the cost. These are commonly referred to as COBRA benefits. See our post COBRA for Early Retirees

Buy a high deductible health insurance policy – You can insure a family of four for less than $100 per month with a $10,000 per year deductible. If you can set aside the $10,000 and are pretty sure your family’s medical expenses will be minimal, this is an effective strategy.

Live in a foreign country – Countries with socialized medicine are what you will looking for. Comprehensive health insurance in these countries is a fraction of the cost of similar coverage in the United States.

Shift your assets away – An estate planner can help you appear indigent in terms of assets. You will qualify for free health care i.e. Medicaid but be aware many physicians do not accept Medicaid and finding one that does can be difficult and frustrating.

Consider a non-profit HMO, if one is available – Non-profit HMOs like Kaiser-Permanente often have lower premiums and better coverage than for profit insurers like Aetna and CIGNA.

Take course at your local university – You may be able to get low-cost comprehensive health insurance from a college or university. You may only need to take one or two courses.

Whichever way you go make sure you have the health insurance issue figured out before you retire. Get whatever documents you need and make sure you understand how everything is going to work. You want to minimize your risk exposure when you retire and getting the right health insurance can make a big difference.

Frugal Simple Living

1. Stop thinking of frugal living as depriving yourself – People who live in a frugal way enjoy the things that are most important to them. A frugal person spends money on things because they enjoy them not because they need to “keep up the Jonses.” Frugal people think independently and don’t have to run out and buy the latest thing. Most importantly frugal people value their freedom. They choose how they live because they are not prisoners of their spending.

2. Find other frugal people and learn from them – There are tons of frugal living blogs with great ideas that you may not know about.

3. Avoid credit care debt – You cannot get by without a credit card in this world. You need them to secure hotel reservations, car rentals, and myriad of other situations. So I am not advocating get rid of all your credit cards. The problem is they can make it too easy to buy things – removing you from seeing how much money you are actually spending. So keep one or two for emergencies and for when the vendor won’t except any other form of payment otherwise pay cash.

4. Eat well – Good food is one of the cheapest ways to prevent health problems. Homemade food has fresher ingredients, less sodium and is way cheaper than pre-packaged food or fast food. Once you start making meals at home you will develop a repertoire of recipes you can rely on and it won’t seem to take so much time.

5. Exercise - A regular exercise program is another way to protect your health. There are countless studies which prove the benefit of daily exercise. If you want to know just how much you will save, take a look at the cost of long term care insurance. One look at those numbers and you won’t want to be a couch potato anymore.

6. Building up a $10,000 Emergency Fund – Having a hefty emergency fund is critical to your financial and mental health. Scary stuff happens but it is not so scary when you have a cushion to shield you. With an emergency fund in place, you don’t have to worry so much and you really can enjoy your life more.

7. Invest 20% of Income – Saving and investing your money wisely is a big part of being frugal. Having money automatically taken out of your paycheck is a great way to do it. You never see the money in the first place so you don’t miss it so much. If your employer has some kind of matching plan, try to contribute as much as you can. If you can’t do 20%, start somewhere even it is just 2% or 5%, start investing now because compound interest is powerful.

8. Create Multiple Streams of Income – With salaries freezing, skyrocketing inflation, and our economy poking along we all could use some extra income.

Many people have a hobby they turn into a second income. The internet also has many opportunities for people to earn a second income. Most bloggers out there including yours truly, blog because they enjoy it but also because there is money to be made.

If you are planning to retire early, getting a second income stream in place is a good way to ensure early retirement is a reality.

9. Scrutinize non essential fixed expenses – Premium Cable TV is a big expense many people have but may not really use. Think about all the things you subscribe to and see if you are really making use of them.

10. Change the way you think about shopping – Evaluate each purchase before you make it. Why are you buying it? Do you need it? Just taking this little pause before you purchase can save you a great deal of money. Often when you really think about it you probably don’t really need the item. You may have something already at home you can use or can maybe even borrow it from a neighbor.

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Early Retirement Blogs

Could you be an extreme retiree? Who are the extreme retirees? Surprisingly, extreme early retirees are a divers e group. They run the gamut from young parents to singles and dual-income couples without children. They share an excitement about their lives, a desire to spend time in pursuits that are meaningful to them, and often, an environmental conscience.

For those who aim to make early retirement a reality, the first big hurdle is coming up with a figure of how much money do we really need to have?

Retirement experts say it depends on how we plan to live. One of the myths is that you will spend less right away – no job to maintain a wardrobe for, less gas with no commute, less wear and tear on the car with no commute, better health from less stress etc.

But if you are planning on traveling a lot those first few years, you’re likely to spend more on traveling and eating out,” says Steven Silbiger, author of “Retire Early? Make Smart Choices.” He he estimates that many people require 100 percent or more of their pre-retirement annual income.

If you are planning on just staying around your area and hanging out with the grandkids and your friends, you can get by on less.

Retirement advisers say make as detailed analysis of your projected living expenses as you can and look at your portfolio to figure out how much money you can take out without draining your capital. If you have big difference in expenses and income, you either need to rethink lifestyle and possibly investment strategies or keep working for awhile longer.

Financial setbacks are not something you plan on but you should consider that they might happen. Look at the prolonged dip in the stock market for example. The stock market trouble forced many to retirees to cut spending, chase higher investment returns and in some cases, even re-enter the work force.

If you quit working when you’re 50, for example, you’ve got 35 or more years to make your money last, so you’d want to have enough assets on hand or be ready to get another job if necessary.

Despite the fluctuations in the financial markets early retirement remains an attainable goal for those who can learn to be frugal and stretch their money. Planning in advance, protecting your assets and being flexible all help to make an enjoyable and sustainable early retirement.

The current rule of thumb is that you should withdraw no more than 4 percent of your portfolio’s value each year, leaving your underlying principal untouched. Some financial planner say you may be able to withdraw up to 6 percent each year if you keep two years’ worth of living expenses in a money market fund or ultra short-term bond fund. Most people now should expect to live until 90.

In a bad market, you use your reserve fund and if the downturn lasts more than two years you take from your capital again but cut your income.

Early retirement is possible, it just takes some planning and a lot of thinking ahead. If your reading this post you are have already taken the first step. For an another perspective on early retirement see our post Frugal Retirement Living

Retire at 30?

One of the big expenses that early retirees need to concern themselves with is health insurance. Most people time their retirement to coincide with Medicare eligibility at the age of 65. Early retirees have to consider other options until Medicare begins.

Consolidated Omnibus Budget Reconciliation Act (COBRA), which passed by Congress in 1986, provides healthcare coverage for retired employees, spouses, former spouses and dependent children for 18 months. The cost is less than what you would pay on your own but more than your rate as an employee.

Early retirees qualify for COBRA benefits under the following conditions:

Individuals who must reduce their hours are also eligible, since health insurance usually drops if an employee does not work a certain amount of hours.

Once COBRA runs out though you are back in the marketplace looking for health insurance. Here are some possibilities to consider given your situation:

No insurance – Some people actually choose this option thinking they will save a lot of money. It is not a good financial strategy because as you age your likelihood of health problems increases. One major problem could wipe out your savings.

Get covered under spouse’s employer-provided health plans – if your spouse is still working and has insurance this is an excellent option.

Check if your employer extends health insurance coverage as a fringe benefit for early retirees - It really depends on your employer how good of an option this will be for you. Different employers have different eligibility requirements (e.g., age or tenure rules) and while some cover the whole premium others may only cover a portion.

Find part time work that offers health insurance – Starbucks, UPS, Walmart, JC Penneys, COSTOC, Sams, Barnes and Nobles, LOWES, Home Depot, Safeway, Kroger, MACY’s, JP Morgan Chase,REI, Nordstrom, Target, Whole Foods, Walgreens, Trader Joes, UHaul, Wegmans, Kaplan, Land’s End, Aerotek (a temporary agency) all offer health insurance to part time employees.

These companies also offer other benefits to part time employees such as: dental and vision insurance, life insurance and 401K, discounted stock purchase plan, tuition assistance and adoption assistance, paid time off, in store discounts for employee and immediate family members, profit sharing (“Gainsharing”), , accident and life insurance coverage even for temporary and seasonal employees, or those who work less than 20 hours per week, short term disability and life insurance, Flexible Spending Account for out of pocket medical and dependent care expenses

Take a part time municipal or county government job – Many county and local governments provide benefits to part-time employees.

Get coverage through associations – Check for trade, fraternal or professional associations such as AARP, AAA, your alumni association or the local chamber of commerce. Check with groups you’re involved with or join one to take advantage of the plan. Your state insurance department can help you find a plan. But be cautious — some of these so-called associations are nothing more than scams.

Early retirees are also helped by the 1996 Health Insurance Portability and Accountability Act (HIPAA) allows workers with COBRA benefits to purchase private individual policies with no preexisting-condition exclusions after the 18 months of COBRA coverage.

Even if you work for a small firms (fewer than 20 workers) you have guaranteed purchase privileges into the individual market when you retire.

The only problem here is “sticker shock.” Rates will most likely be higher than you experienced with COBRA.

Want more information on how to make early retirement possible? See our post Frugal Retirement Living

Retire Early and Frugally

Here is an interesting perspective on frugal living that goes along with our mission to live frugally but still enjoy life and live well.

One author of a frugal living blog describes frugal living as “to look at optimizing efficiency and utility – one will become frugal, rather than just do frugal things.”

This blogger claims he spend about 75% less than the average person, and yet gains an equivalent level of satisfaction.

One of things he mentions that helps you cut expenses during retirement is to live in a smaller dwelling and be within walking (or cycling) distance from work, libraries, and shopping areas.

If you don’t have children living with you, you will not have to worry about what school district you are in.

Large homes have high maintenance costs. You have to pay higher taxes, heating, cooling, lighting and water bills. Plus you have a large outside area to maintain. A smaller home will scale down many of your monthly expenses.

If live close to where you shop, play and work you will probably not need a car or be able to get away with one if you previously had two. You decrease your bills tremendously if you are only insuring and maintaining one car instead of two. Plus you get more exercise if walk to do some of your errands.

The frugal blogger I checked out said “If you take the money you’ll spend on your car and invest it in your retirement, you will add one million dollars extra to your early retirement account.”

Another tip is to stay healthy and exercise regularly. Health insurance is expensive and you probably will be paying for a portion of it yourself. So preventing future health problems is one of the best things you can do to prepare for early retirement.

Eat a good healthy diet and take care of your teeth. Dental procedures are really expensive so make sure you floss and get regular dental checkups.

Reducing clutter can also help you on your way to early retirement. Anything that you own has to be maintained. Furniture has to be cleaned, electronics need to be repaired, knick knacks take up space etc.

Before you make a purchase of a non-consumable item, think about if you really need it. If for instance it is a tool to make a repair, ask a neighbor if you could borrow theirs.

The less stuff you have, the more financial freedom you will have.

Try to avoid fixed costs for things you do not use all the time. For many people this could be cable tv or magazine subscriptions. You might want to consider Netflix instead of cable and going to the library occasionally to read your favorite magazine. You get the idea how your mind needs to orient itself to live frugally but comfortably.

Notice I have not mentioned anything about eating macaroni and cheese three times a week or keeping hens to save on buying eggs. Actually macaroni cheese is not very healthy and the hens might be fun but you see the point.

There are plenty of ways to cut expenses so that you can retire early without feeling like you are living a sub-standard lifestyle.

So keep riding with me on our journey into frugal living made easy. Knowledge is power so if you want to learn more ways to cut expenses see our post Understand Credit Card Grace Period Due Dates

Do You Need To Save For Retirement?

If you ask most people if they need to save for their retirement, and they are honest about it, they will say they needed to start saving long ago. Of course, most people had some sort of retirement plan set up in the past But the average American has not stayed on course, and they do not believe they have enough saved for a comfortable retirement at all.

If you would like to get back on course with your retirement plans, there are dozens of ways to do it. Some of these plans are open to almost everybody.

410K at Work

Does your job have a 401K plan? Many allow employees to automatically invest in a variety of plans. Some companies even match a portion of these funds, making this an obviously good idea. If you plan to be at your job for a few years, you will be happy to see how much small contributions can grow into tidy sums. You may also enjoy some tax deductions that you can use in the current tax year.

Individual IRA Plans

If you do not have an employer based plan, you are free to set up your own individual retirement account. You can choose a traditional or Roth IRA. You might be able to set up a plan at your bank, or even with an Internet company. You can even have them perform automatic deductions from your checking or savings account.

Retirement Annuities

Insurance companies also provide another solution that helps you use your money to give you retirement income. These are called annuities. There are several varieties of annuities, but if you are trying to use one to save for your future income, you may be interested in a deferred annuity.

You may fund them with one large payment. However, at this point it may be more useful to fund your annuity with a smaller initial contribution, and then keep adding to the balance every period. You can use this free deferred annuity calculator to see how much your savings can grow.

Can You Save For A Comfortable Retirement?

The longer you have to accumulate assets, the better off you will be. However, you will never be in a better position to start than you are today!

Everyday Cheapskate

Cheapskate Living Baby Steps!

At first when you hear the phrase frugal living it sounds like you have to start reusing your aluminum foil over and over again or living on macaroni and cheese like you did when you were younger.

You think it is just a nice way of saying you don’t make enough money. Believe me, I have been there. Actually though frugal living means something completely different. Not like the Monty Python and now for something completely different but a more peaceful way to live. There are many wealthy people who engage in frugal living and it is probably one of the reasons they are wealthy.

I learned about the relationship between frugality and contentment from a book called “Don’t Sweat the Small Stuff” by Richard Carlson and another book called Simple Abundance by Sarah Ban Breathnach.

Both authors talked about the endless cycle we all go through of when we get something we immediately start thinking about the next thing we want. Dr. Carlson gave the example of a friend his who bought a home. As soon as he closed on it, the friend started talking about the next bigger home he was going to buy. We have all experienced this cycle.

We are happy for a short period of time because we stopped focusing on what we don’t have but the wanting feeling comes right back and we start thinking about the next thing we have to have.

Frugal living is not about having less but being satisfied with what we have right now and we have a lot. Both authors advise “counting your blessings” and it does help make you feel better.

When you get into the mind set of being happy with what you have it translates into better financial and mental health.

Better financial health because when you are content you are less likely to use your credit cards to buy things you may want but not really need. Often we spend money because we have built up huge expectations that the item will make us feel better and improve our life somehow. Then we get disappointed because the purchase didn’t make our life happier. Plus we have the added worry of more debt.

Frugal living is a way of breaking out of that credit card debt financial misery cycle. It does not mean you will never buy anything new again but when you do buy that car, computer or piece of furniture, you know have done it for the right reasons.

Sometimes credit card debt is unavoidable – you need to fix your car, a major appliance or have medical expenses. When that happens though you are better prepared because you may have more available credit since you converted to the frugal lifestyle. Better mental health because you know you are not overspending and it helps you feel that you are more in control of your life.

If you are anywhere close to retirement frugal living can help you have a more comfortable retirement. If you want to retire at 30, frugal living will help you get there.

You don’t have to buy a course, read a book or sign anything to begin your journey in frugal living. Just begin by focusing on what you have and feeling content. When you start to think about what you don’t have just dismiss that thought. Count your blessings.

Stay tuned for more lessons in frugal living. The journey is more fun if you go with someone, so let’s go together.