by Joe Hearn | Oct 30, 2013 | Retirement, Social Security
When it comes to retirement, your bank account is more important than your birthday. Even so, there are several key retirement ages that you will want to keep in mind as you plan.
Age 50: Once you hit the big 5-0, the government raises the contribution limits on your IRA and 401(k). For those turning 50 in 2013, you can put an extra $1,000 into your IRA and an extra $5,500 into your 401(k). That raises the contribution limits to $6,500 and $23,000 respectively. These “catch-up” contributions can be great if you still have some ground to cover in order to reach your savings goal.
Age 55: If you plan on retiring earlier than most, 55 might be a good target. That’s because there is a provision in the tax code that allows you to take early distributions from your retirement plans at age 55 without paying the usual 10% penalty. These are called 72t distributions and, as you might expect, certain rules apply. Work closely with a trusted adviser if this is an option you’re considering.
Age 59 ½: This is the magic age where the government allows you to start taking distributions from your retirement plans without paying the 10% early withdrawal penalty.
Age 62: This is the earliest date that you can elect to receive Social Security benefits. As I said in a recent article, however, claiming Social Security at age 62 is like buying a pair of leather pants: almost always a bad idea. Claiming at 62 would result in a 25% permanent reduction in your benefits. The longer you wait, the more you will get.
Age 65: This is the age that you become eligible for Medicare. If you’re already receiving Social Security benefits by your 65th birthday, you’ll be automatically enrolled in Medicare. If not, then you’ll need to actually sign up. You will have a 7-month window to enroll: 3 months before your birth month, your birth month, and 3 months after. Sign up in that window, because there are penalties if you sign up late.
Age 66: Most baby boomers can receive full Social Security benefits at age 66. Depending on when you were born, however, you might be able to get full benefits a little sooner or have to wait a little longer. Check here to see when you will be eligible for full benefits.
Age 70: Just like the Social Security Administration reduces your benefits if you retire early, they increase your benefits if you retire late. For those born after 1943, you get an extra 8% for every year you wait past full retirement age up to age 70. After age 70, there’s no benefit for waiting. Said another way, claiming Social Security benefits at 62 will result in the smallest check and claiming at 70 will result in the biggest check.
Age 70 ½: One of the key benefits of your retirement accounts is that they grow tax deferred. Uncle Sam can’t wait forever, though. Congress needs money to fund all those brilliant schemes that they’re always hatching. So at 70 ½ they start forcing you to take required amounts from your retirement accounts each year. Work closely with your adviser to determine your Required Minimum Distributions (RMD), because there is a 50% tax penalty on any amount that you should have taken, but didn’t. The RMD rules don’t apply to Roth IRAs.
~ Joe
Photo by louderthanever. Used under Creative Commons License.
by Joe Hearn | Oct 18, 2013 | Lifestyle Design, Pursuits
Life is busy. One day runs into the next and then the next, a constant blur of busyness, work, errands and seemingly important (at the time at least) comings and goings. If you’re not careful, you look up one day and wonder where the last 20 years went. That’s why I spend so much time talking about being intentional. No on cares more about your life than you. If you aren’t focused on wringing the most from your days, it’s a safe bet that no one will be.
We know this, of course, but sometimes it’s good to have a reminder. It’s good to have someone come along and whisper “carpe diem” or “nothing gold can stay.” So when I came across a thought provoking video recently that breaks down our days and how we’ll spend them, I wanted to share it with you. Just click the link below for the short youtube video.
And if you want a bit more on the topic, here are a few articles from the archives.
Have a great weekend.
~ Joe
by Joe Hearn | Oct 7, 2013 | Social Security
No, you didn’t miss the memo. The government hasn’t announced any plans to cut Social Security. At least not overtly. They have, however (in my opinion), been covertly reducing the value of Social Security payments for years. How?
In order to account for inflation, Social Security payments have a cost of living adjustment built in. If inflation (as measured by the Consumer Price Index) is 3 percent, payments are increased by 3 percent. This works great and everyone is happy, as long as the inflation estimate is accurate. If the government underreports inflation, however, then the raise they give you isn’t enough to offset the increase in prices.
As you may have guessed, many people believe this is happening. There have been several changes to how the government calculates inflation over the years, all of which have had the same affect: To reduce the reported inflation rate. The current Consumer Price Index (CPI) is currently around 2%. Using the methods in place prior to 1990, that number is closer to 6%. Using the methodology in place prior to 1980, that number is closer to 9% (See chart below from shadowstats.com).
I don’t know about you, but when I reflect on my expenses over the last year—property taxes, groceries, cable bill, gas, health insurance—it’s fairly evident that they increased by more than 2%. What if the actual rate of inflation is closer to 6%? How will that affect a person receiving Social Security benefits? It doesn’t take a genius to see that, if inflation is 6% and the government gives you a 2% raise, they have effectively cut your benefits by 4%. If that same pattern repeats itself for 10 years, the purchasing power of your benefits will have been cut by about a third. They are giving you more money, but that money buys less.
Warren Buffet And the Widow
All of this reminds me of a story that Warren Buffett once told about an elderly widow with a passbook savings account.
“The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5% passbook account whether she pays 100% income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5% inflation. Either way, she is “taxed” in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120% income tax, but doesn’t seem to notice that 6% inflation is the economic equivalent. If my inflation assumption is close to correct, disappointing results will occur not because the market falls, but in spite of the fact that the market rises.”
Applying that same logic to Social Security, we would find it outrageous if the government cut our Social Security benefits, but seem not to notice that inaccurate cost of living adjustments are the economic equivalent. Disappointing results will happen not because the government cuts our Social Security benefits, but in spite of the fact that they raise them.
The Solution
The best way to overcome this hurdle is to build your own inflation factor into your Social Security benefits. How do you do that? Rather than waiting until full retirement age or later, the average person retires at 62 and takes a roughly 20 percent permanent reduction in benefits. Rather than following their lead, if you wait a few years you can retire on full benefits. Even better, retire a few years “late” and you can add as much as a third to your annual benefit (8 percent per year for those born after 1943 to a maximum age of 70). The annual cost of living adjustment will likely still be understated, but it will be based on a much higher benefit amount.
Before signing off, I just wanted to make clear that I’m not so much criticizing the Social Security Administration as I am the methodology for calculating inflation. As government agencies go, I’ve always felt that the SSA does a good job with the difficult task that they’ve been given. I know that several people who work for the agency read this blog. If you’re one of them, I’d love to hear your thoughts (pro, con or otherwise) on today’s post so we can all understand this issue better. Just leave a comment at the bottom of the post.
Thanks and have a great week.
Joe
by Joe Hearn | Sep 23, 2013 | Lifestyle Design, Mini-retirements, Work
Based on the huge response to my initial “Mini-Retirement” post, I think I can safely draw two conclusions:
#1: There are A LOT of you who don’t buy into the “save the best for last” philosophy of retirement. No surprise here. IR readers are all about living intentional rather than conventional lives.
And…
#2: While you love the concept, some of you are a little uncertain how to make it work for you. In other words, the “want to” is there, but the “how to” is a little fuzzy.
The comment I heard most went something like this: “I love the idea, but I don’t think I could make it work because of my job.” Fair enough. I’m fairly attached to my paycheck too. The good news is that living an interesting life and doing meaningful work aren’t mutually exclusive. If you want to make it happen, you can. Below are some ideas to get you thinking how.
Making mini-retirements work with work.
Note: Not every idea will work for every person, but I’ll bet there is more than one thing on the list that will work for you.
Take the easy wins. Many of us have a certain amount of paid vacation and sick time each year. Some companies even allow you to bank unused time year after year. Rather than spreading those days out in one or two day increments throughout the year, take it all at once. For many, this idea alone will be enough to move mini-retirements from pipe dream to possibility.
Rearrange your hours. Some jobs have a great deal of flexibility. Others are a bit more rigid and follow a basic formula of trading time for money. For those with the latter, your employer’s primary concern is that you’re putting in the hours and doing the work.
A full time job is usually 2,000 hours per year: 40 hours per week for 50 weeks with a 2 week vacation. What if you flipped that equation and worked 50 hours per week for 40 weeks and then took 12 weeks off? Not sure your employer would go for it? Propose 43.5 hours per week for 46 weeks and then take 6 weeks off. Or even 41.7 hours per week for 48 weeks and then take four weeks off. With any of those options your employer is paying you exactly the same amount of money, you’re working exactly the same amount of hours and you’ve got time each year for a mini-retirement.
Ask for your raise to be paid in time off. Companies have been watching their pennies pretty closely since the meltdown in 2008. Consequently, your boss might not be very receptive if you ask for a raise, even if you deserve one. You could probably improve your odds if you ask for that raise to be paid in time off instead of dollars. It’s a win-win. The company keeps a lid on expenses and you get more time off.
Optimize your schedule. Many of us have jobs where we’re not doing the exact same thing day in and day out. There is an ebb and flow to our tasks and responsibilities. We have busy times and slow times throughout the year. Times that require a lot of face to face interaction and times where any old computer and phone will suffice. My job is a lot like this. It gets busy and interactive during client reviews or when I’m doing seminars, but summers and holidays are usually dead. It wouldn’t take much for me to rearrange my schedule so that the things I need to be present for are all concentrated in certain months and the things I can do remotely are shifted to a mini-retirement month. This is a good option for those who want to take extended time off while still maintaing momentum at work.
Batch tasks. Improved productivity means that you can do the same amount of work in less time. If you have one of those jobs that is more focused on completing certain tasks rather than putting in certain hours, batching can be a big help. Most of you probably already use batching when you do things like pay bills. Rather than grabbing your checkbook every time you go to the mailbox, you save up that month’s bills and then pay them all at once. Are there parts of your job that you can batch in order to be more efficient? Once the work is done, what’s keeping you behind your desk (besides inertia)?
Use technology for location independence. For many of us, our jobs are perfectly designed for the people who did those jobs 10 years ago. We commute to a special building and then sit in a fabric covered box (cubicle) so we can use a computer and a phone (sounds glamorous!). Technology has made the building and the box, if not obsolete, at least less important.
We still need the computer and the phone, but technology like Skype, Go To Meeting, wireless internet, cloud computing, instant messaging, Google Voice and collaboration software (e.g. Asana, BaseCamp) have made it possible for many of us to do some or all of our job from just about anywhere (a.k.a. location independence).
Being gone for a year might not be realistic, but would it be possible to take a month or two off and use technology to keep up with important projects and deal with urgent issues even while you’re gone?
Negotiate a remote work agreement. According to Forrester Research, more than 34 million people work remotely. That number is expected to hit 63 million by 2016. I’m skeptical that most bosses would be ok with you working in your pajamas from home 365 days per year, but if you combine this idea with one or more of the previous ones, I’m guessing that a reasonable boss would be willing to allow you to work remotely for a fixed period (say 6 weeks) and only count part of that time as vacation.
Sacrifice. All of the options up to this point involve still getting your paycheck. If you didn’t find something on the list that works for you, maybe it’s time to take more drastic action. This could include taking unpaid time off or quitting/changing jobs altogether. Obviously, that’s a little more painful because it involves change and sacrifice, but I think it’s important to ask yourself this: “If my current job keeps me from living the kind of life I want to live, should I really stay there for the next 10, 20 or 30 years?” If the answer is no, a change may be in order.
Putting it into practice
Anytime you’re trying to wrap your mind around something that is unconventional and complicated, it’s helpful to know that it’s possible. That’s why it’s been so encouraging to me this week to hear how some of you are working to make mini-retirements a reality. There’s the couple planning to move to Spain for a year with their kids. There’s the family who, after reading my initial post on mini-retirements, read it aloud at the dinner table and had a mini-retirement to New York booked by the end of the week. There’s the friend who is consistently updating me while living in the Congo for three months as a volunteer for Mercy Ships. These stories and more are good reminders that, with a little planning and effort, we don’t need to defer our dreams until “someday.” I hope you’ll join in with the rest of us. Feel free to leave a comment or question on the site and touch base with me if there’s ever anything I can do to help.
Have a great week!
~ Joe
by Joe Hearn | Sep 10, 2013 | Lifestyle Design, Pursuits, Retirement
What is a mini-retirement?
Long-suffering readers know that I have a bit of a different take on retirement than most. Where others see something based on age or assets, I see something based on control. Where others see a life-stage, I see a lifestyle philosophy.
After all, why should living the life you truly want to live depend on how many birthdays you’ve had or whether or not you punch a time clock? How in the world has it become acceptable to defer your dreams and push the best things in life to the very end?
The concept sounds great, of course, but how do you do it? I’ve offered some ideas before (for example, here, here and here), but I’d like to expand on an additional idea that I’ve only briefly mentioned in the past: Mini-Retirements. What exactly is a mini-retirement?
With traditional retirement, you save up the good stuff for that 20-30 year period at the end of life.
The idea of mini-retirements takes some of that 20-30 year period (say 5 years), breaks it up into 1-3 month chunks and spreads it out over your working years. A mini-retirement is longer than a vacation, but shorter than…well…retirement.
As you might imagine, there are a number of benefits to taking these extended periods off:
- You have time to actually experience a place rather than just visiting the touristy spots.
- It allows you to enjoy some of the benefits of retirement while you’re still young and healthy.
- It rejuvenates you and can help you come back to work more engaged and more productive.
I didn’t invent the idea of mini-retirements (I was introduced to it by Tim Ferriss), but the concept fits perfectly with my philosophy here at Intentional Retirement. Namely that retirement shouldn’t be something that is delayed until “Someday,” but rather it should be an incremental process that is incorporated into your life now.
My mini-retirement experiment
Renting an apartment in Madrid or Melbourne and immersing yourself in the culture for a few months sounds great, but there are a number of challenges. For example:
- How do you pay for it?
- How can you get the time off work?
- Where should you go?
- What about your spouse and/or kids?
- What do you do with your house when you leave?
- What type of planning is involved (e.g. housing, airfare, language barrier)?
To answer those questions, I plan on researching and writing a series of posts and then scheduling a mini-retirement for myself by the end of next year (You may have noticed a few of them on my 50-by-50 List). As some of you know, I’m working, married and have an 8-year-old daughter, so this will be no small task. I don’t yet know where, when or how, but I know why and as faithful readers know, why is half the battle.
So follow along and let’s figure it out together. I’d love it if some of you were inspired to do something similar. Feel free to email me questions or leave comments in the articles about your own thoughts and planning. It’s always easier to tackle big goals when you have company.
Hope to see you on the road.
~ Joe
P.S. Have you read the IR Manifesto A Brief Guide to Retirement Bliss? If not, you can download a free copy over here.
Photo courtesy of Mihhailov. Used under Creative Commons License.
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