by Joe Hearn | Apr 24, 2013 | Debt, Income, Retirement
“When can I retire?” I get that question a lot. If you’re curious about the answer, look no further than your retirement budget. The more money you want to spend during retirement, the more you’ll need to save before you get there and the longer you’ll likely need to work. It stands to reason then, that you can probably retire sooner if you can figure out a way to spend less during your golden years. What are some ways to downsize your expenses without downsizing your dreams for retirement?
Think Big
It has almost become dogma over the last decade that financial security comes by giving up things like your daily latte. That advice can certainly help you sock away a few extra dollars over the years, but if you’re getting close to retirement and find yourself tens (or hundreds) of thousands of dollar short of your goal, drinking Folgers instead of Starbucks isn’t going to solve your problem. It’s just not a big enough line item in your budget. If you want to make a big impact, you need to focus on big expenses.
According to a recently released report by the Social Security Administration, the two biggest expenses for most retirees are housing (35 percent) and transportation (14 percent). Said another way, almost half of your retirement budget will go to pay for the roof over your head and the vehicles in your garage. Let’s look at an imaginary couple to see how cuts in those areas can make a big difference.
John and Linda would like to retire next year. They decide to hire an adviser to look over their plan and, much to their dismay, the adviser tells them that they need to save another $300,000 to adequately fund their retirement. At the rate they are saving that would mean delaying retirement for another 10 years. Instead, they look at their retirement budget for ways to cut back.
With the kids gone, they have more space than they need, so they sell the house for $250,000, move into a $150,000 condo and pocket the extra $100,000. With carpooling and soccer games a thing of the past, they trade in their SUVs on two smaller cars (net gain $20,000) and even kick around the idea of sharing a car once neither of them is working. The smaller house and more fuel-efficient cars also means that they’ll be spending about $500 less each month ($6,000 per year) on taxes, utilities, gas and maintenance. Assuming a 4 percent withdrawal rate, that $6,000 annual savings means that they can get by with $150,000 less in their nest egg.
The total benefit, then, from cutting back in just those two areas was $270,000 (or 67,500 lattes). Not bad. They still have $30,000 to go, but at the rate they’re saving they should be able to set that aside and still retire next year as planned.
[Note: To consider ways to trim your own budget, you can download a free retirement budget worksheet at www.intentionalretirement.com/budget.]
Retire Debt
Another way to increase retirement security and perhaps even retire sooner than expected is to eliminate debt. It used to be common for people to enter retirement with little or no debt. Unfortunately, that is no longer the case. According to a recent study by the Employee Benefits Research Institute, 65 percent of American families with a head of household age 65-74 had debt. The age group with one of the biggest spikes in debt was 75 and older.
Not surprisingly, debt makes it harder to fund your retirement. It cuts into your cash flow and increases the risk that you will run out of money. Again, let’s assume that you can draw 4 percent per year from your assets during retirement. That means that for every $1,000 in annual income that you want during retirement, you’ll need $25,000 in savings.
Look at your current budget. How much do you spend each year on debt payments (e.g. mortgage, car, credit cards)? Multiply that number by 25. How much is it? $250,000? $500,000? More? That’s how much you’ll need to save in order to service that same amount of debt in retirement. As you can see, retiring will be much easier if you retire your debt first.
So as you plan, don’t think of retirement as a particular age or work status. Think of it as the time in your life when you can afford to pay your bills through means other than your job (e.g. personal savings, pension, Social Security).
When you look at it that way, it becomes clear that you can reach your retirement goals from two different directions. “Save more for retirement” is certainly one way, but “spend less in retirement” can be just as effective.
~ Joe
Note: I first published this article in the Omaha World Herald.
by Joe Hearn | Apr 11, 2013 | Social Security
[Note: As most of you know, I’m a financial adviser. I use a program called Social Security Timing to help clients determine the best Social Security strategy for their situation. I’ll run that report for free for the first 20 of my readers (that’s you!) who request it. Certain conditions apply, so just email me if you’re interested (joe@intentionalretirement.com).]
Social Security is a major source of income for many retirees. How major? The average retiree gets about 40 percent of their income from Social Security. For older retirees, that percentage surpasses 50 percent. It stands to reason then that we should all want to maximize our Social Security benefits. Here’s how.
Wait
You can choose to claim your benefits early, on time or late. “On time” is also known as your full retirement age and it varies depending on when you were born. If you were born after 1960, your full retirement age is 67. If you were born between 1943 and 1954, your full retirement age is 66. Full retirement increases by 2 months per year for those born between 1955 and 1959 (e.g. 1957 = 66 and 6 months).
If you claim early, your benefits will be reduced by 5/9 of 1 percent per month for the first 36 months and 5/12 of 1 percent for anything over 36 months. For example, a person born in 1950 who claims at 62 instead of 66 will see his or her benefits permanently reduced by 25 percent.
If you claim late, your benefits will increase by 8 percent per year for each year you wait (for those born after 1943). So if you want to maximize your Social Security, it’s usually best to wait to claim until on or after your full retirement age. One instance where it might make more sense to claim early would be if you are in poor health and don’t expect to live very long.
Don’t work
If you’re still working and haven’t reached your full retirement age yet, you should think twice before claiming benefits. That’s because your Social Security check will be reduced by $1 for every $2 you earn above $15,120 (for 2013). In the year you reach full retirement age, the penalty is reduced to $1 for every $3 above $40,080.
Unlike the penalty for claiming early, the work penalty is not permanent. It goes away once you reach full retirement age and your benefits will be increased to compensate you for the prior reduction. But that doesn’t really help you if you claim early thinking you’re going to supplement your paycheck, only to have those benefits withheld because you make too much money.
Coordinate with your spouse
When claiming, both you and your spouse have a variety options. Add to that the fact that you are typically entitled to either the benefits you earned yourself or an amount equal to roughly half of your spouse’s benefit and the complexity multiplies quickly. If you can coordinate your claiming strategies, you can greatly increase your lifetime benefits. I have seen couples increase their lifetime benefits by $100,000 or more simply by having a well thought out, coordinated strategy.
Don’t forget your Ex
If you’re divorced and haven’t remarried, you may be entitled to claim benefits based on your ex-spouse’s record. The primary stipulations are that a) you were married for more than 10 years, b) you haven’t remarried and c) you’re older than 62.
So there are a few ideas for maximizing your benefits. Don’t forget to touch base if you want me to run the Social Security Timing report showing you the best strategy for your situation.
~ Joe
by Joe Hearn | Apr 1, 2013 | Lifestyle Design, Pursuits
Have you ever looked back on pictures of a younger you and said something like, “Where did the time go?” Why does time often feel so fleeting? More importantly, is there anything we can do to slow it down? How can we keep life from feeling like such a vapor? I’ve been spending some time thinking about that lately. So far I’ve come up with three things.
Don’t procrastinate—Think back to school. Did you ever wait to study for a test or write a paper until the night before it was due? Whenever I did that, I got the sense that it had snuck up on me. When I first got the assignment, it felt like I had plenty of time. No need to rush. Other things were more urgent. And then all of a sudden “plenty of time” turned into “now or never.” What happened?
When you procrastinate, the passage of time becomes a nagging reminder that there is much left undone; that most of your dreams are still on the drawing board. When your time gets short and your To-do list stays long, the time flies by.
When you actually DO stuff, however, your To-do list is shrinking right along with your remaining time. You don’t get that same feeling of rushed panic (at least not to the same degree). Yes the time went by, but you used it wisely. If you spend your life saying “Someday,” I suspect you will reach the end with an overwhelming sense that it went by too fast. Don’t wait for someday. Someday is here.
Break routine—I’ve mentioned before that we have a goal of getting out daughter to all 50 states before she graduates from high school. A few weeks ago we went to St. Louis, Missouri (otherwise known as state #17).
It wasn’t a major trip, but we had a fun time. We found several great restaurants, visited the Arch, went to the City Museum (probably the coolest “museum” in the United States) and had a fun time hanging out as a family.
Had we stayed home and done the same old thing that we do every weekend, I would have forgotten about it by Monday. But we did something different. Something out of the ordinary. And because of that, all three of us will likely never forget that weekend. We’ll always have those shared memories, stories and photographs.
To keep time from flying by, break up your routine. If you go through life doing the same thing, day in and day out, there won’t be much to remember. It will seem like the same day lived over and over. Life will seem so short because it won’t be packed with memories. But if you make sure to periodically do interesting and out of the ordinary things, your life will seem long and full. As I have said before, focus on milestones instead of maintenance.
Do less—At first, doing less might seem like a counterintuitive way to have a fuller life, but stick with me for a second. If you pack your schedule with too much, you don’t have time to savor life. It’s the difference between enjoying a nice meal with friends and competing in a hot dog eating contest. In one you have a chance to enjoy the food and engage in interesting conversation. In the other you’re trying to shove in as much as you can as fast as you can. You might end up eating more in the hot dog eating contest, but you will also end up enjoying it less. Unfortunately, many of us (e.g. me) live our lives like it’s a hot dog eating contest. We’re trying to shove in as much as possible. There’s a fine line between living a full life and cramming so much stuff in that you feel rushed and can’t enjoy it. Beware of the busy virus. Simplify.
Have a great week. Make it interesting!
~ Joe
by Joe Hearn | Mar 21, 2013 | Happiness, Investing, Lifestyle Design
The retirement question most people seem intent on answering is “How am I going to pay for it?” That’s an important question, of course, but retirement is more than just a math problem.
In my opinion, we spend too much time thinking about how to get there (math) and not enough time thinking about what we’re going to do once we arrive (meaning). If you focus solely on your finances, you risk having a retirement that is cash rich and lifestyle poor.
Cash is great, but it’s not the end goal. Your money is nothing more than fancy paper that our government has created to make commerce and exchange easier. The end goal is not to have money. It’s to use that money to do things that you really care about; things that provide joy, meaning and fulfillment. If you do that, then money (contrary to popular opinion) CAN buy happiness. Let me show you what I mean. I’m assuming you’re all familiar with the mathematical proof: If A=B and B=C then A=C.
Applying that to our discussion:
- If money=control
- And control=doing what fulfills you
- And doing what fulfills you=happiness
- Then money=happiness.
Of course that transitive logic only holds true if you use the time you control to do what fulfills you. Which brings me back to my original point: If you want a meaningful retirement, then you need to treat your planning like more than just a math problem. You need to decide what it is that you really want out of life and use whatever resources you have and time you control to pursue those things. Are you doing that? If so, great. If not, spend some time thinking about what it is you actually want to do with all that money you’re saving.
Have a great week.
Joe
by Joe Hearn | Mar 12, 2013 | Learning Challenge
“The man who doesn’t read good books has no advantage over the man who can’t read them.” ~ Mark Twain
I spend a good part of every day reading. Some of that is for pleasure, some for education, some for work. I read books, magazines, newspapers, blogs, social media, trade journals, research reports, financial statements and regulatory filings.
Here’s the problem. I’m a painfully slow reader. Painfully. Slow. Reader. As a result, I always have a pile of books on my nightstand and stacks of newspapers and magazines on my desk waiting to be read. I eventually get to most of it, but I’m definitely more tortoise than hare.
With so much room to improve, I thought it was an area that was ripe for a learning challenge. I’ve spent the last week or so reading everything I could find on speed reading. My goal is to double my speed (without sacrificing comprehension) in 30 days. If I can do that, I’ll cut my typical daily reading time in half (from about 3 hours to 1.5) and free up time to either read more or do something else.
Step 1: Test my current speed
To get a baseline, I took a timed reading test at ReadingSoft.com, followed by a reading comprehension test. I read at about 213 words per minute with a comprehension of 82 percent. According to the site, that’s about average:
- Insufficient reader: 110 wpm, 50% comprehension
- Average reader: 240 wpm, 60% comprehension
- Good reader: 400 wpm, 80% comprehension
- Excellent reader: 1000 wpm, 85% comprehension
Step 2: Where can I most improve
There are a number of techniques to help you read faster and with better comprehension. After learning about those and thinking about how I read, I feel like I can easily double my speed if I work on three key things:
- Stop subvocalizing: If you’re like most people, when you read to yourself you pronounce the words in your mind. I know I do. In fact, prior to reading about subvocalizing, I didn’t even consider the fact that it was possible to read something without saying the words in your head. It is, however, and if you can figure out how, it will make a huge difference in your reading speed.
- Get rid of distractions: I will often read with music on in the background, my cell phone by my side and/or while sitting in a room with other people. I’ll often end up getting distracted if my phone beeps or someone asks me a question. To improve my speed I’m going to start getting rid of the distractions.
- Improve perceptual expansion: If you focus on a particular word while reading, you can see several words before and after that word thanks to your peripheral vision. If you can train your eye to see and comprehend those words without having to read each line of text from beginning to end, you can greatly increase your speed. Take the following sentence for example: “If you want to have a meaningful retirement, you need to be intentional.” An untrained reader will read each word in that sentence from beginning to end. A trained reader will start with “want” and end with “need,” using his peripheral vision to comprehend the rest. This reduces the total amount of words that need to be read and greatly increases speed. For more on perceptual expansion, read this post by Tim Ferriss.
Those are the tips that were most helpful to me, but there are many others such as:
- Read early in the day
- Use a flexible reading speed depending on the material
- Train yourself not to reread
- Follow text with your finger (to improve eye efficiency)
Step 3: Practice and Measure
For the next 30 days I’ll practice the techniques outlined above. I downloaded an app called Toggl (get it for free in the App Store) that I will use to time myself and track how long it takes me to read each of the books that I’ll be using for practice this month.
Step 4: Retest
At the end of the 30 days I’ll retake the speed/comprehension test so I can see how much I was able to improve.
As with all of our learning challenges, I’d encourage you to follow along. If reading isn’t your thing, feel free to look back on our other learning challenges for ideas and read this for a good refresher on why it’s important to be a lifelong learner.
I hope you’re all doing well. Touch base if I can ever help.
~ Joe
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