by Joe Hearn | Sep 27, 2012 | Distribution Planning, Retirement
Your 401(k) is a great tool for accumulation, but it’s probably not the best place to leave your money once your goals shift to distribution. After retiring, it usually makes sense to roll your money out of your 401(k) and into your IRA. Here’s why:
Simplification. The average person changes jobs several times over the years. That could mean multiple retirement plans at former employers in addition to your IRAs and other investment accounts. During retirement, you will need to begin drawing money from those accounts. The more accounts you have, the more complicated that becomes. If you have multiple 401(k)s, roll them into an IRA. If you have multiple IRAs, consolidate them into a single account. Doing so will cut down on paperwork and expense and will make your distribution strategy easier to manage.
More choices. Your 401(k) likely has a limited number of investment options. That’s not the case in your IRA, where you can invest in pretty much any stock, bond, mutual fund or ETF. More choices typically means more money, because you can choose funds with better performance and lower expenses.
More control. When it comes to accessing your money, your IRA has fewer limitations and rules than your 401(k). For example, you can take penalty free early withdrawals from your IRA for things like higher education or certain medical bills. In addition, your 401(k) may have restrictions on how often you can make changes to your investment allocation. Finally, most people prefer to call the shots on their account rather than having to deal with their former employer every time they need to make a change or take a distribution.
Better beneficiary options. Your 401(k) will typically require you to list your spouse as the primary beneficiary unless he or she consents to you naming someone else. That can complicate planning for those in their second marriage who want to keep certain assets separate. Also, if your spouse dies first and you haven’t named someone else, the 401(k) will typically default to your estate when you die. That can result in unwelcome tax consequences.
With an IRA, you can name anyone as your beneficiary and that beneficiary has more distribution options than they would if they were inheriting from your 401(k). With the IRA, they can choose to distribute the money over their lifetime, rather than being forced to take it all at once as with the 401(k). That can spread the taxes out over many years.
Easier Required Minimum Distribution (RMD) calculations. When you turn 70 ½, you are required to begin taking minimum amounts from your IRA and 401(k) accounts. The fewer accounts you have, the easier it will be to calculate the correct amount and take the proper distribution. Make a mistake and you will owe a big penalty to the IRS.
by Joe Hearn | Sep 18, 2012 | Happiness, Hobbies, Pursuits, Retirement
When I was in college, I rented my body to science so I could have enough money to buy groceries. There was a medical testing facility not far from my apartment and they would pay you around $500 to check in on Friday, check out on Sunday and allow them to test some new wonder drug on you in the interim. I didn’t have much in those years (as you’ve probably already deduced), but I was happy.
After graduating, I was able to leverage my finance degree into a career that no longer required me to spend my weekends subjecting myself to Hunter S. Thompson style pharmacological testing. I got married and moved into a nicer apartment. We eventually moved into a house and continued down the path of pursuing the “American Dream.”
Given that little bit of information, you’d think I would be happier now than I was 20 years ago, but that’s not really the case. I’m happy for sure, but my level of happiness doesn’t seem to have grown in tandem with my standard of living. I was happy then and I’m happy now.
Behavioral psychologists refer to this phenomenon as the hedonic (or happiness) treadmill. It is our tendency to quickly return to a relatively stable level of happiness despite changes to our standard of living. Basically, our expectations rise in tandem with our income. The more we have, the more we think we need.
Because we want to be happy, we (somewhat predictably) deal with the hedonic treadmill by constantly upgrading our “stuff.” We buy the new iPhone, television or car and it makes us happier for awhile, but we eventually get used to those things so we upgrade to the next gadget or gizmo. The more we have, the tougher it is to move the needle on our happiness meter. We run faster and faster without really getting anywhere.
Is there a way to get off the treadmill and actually derive some lasting happiness from the resources that we’ve been blessed with? Yes, according to behavioral finance expert Dan Ariely. “The best way to maximize happiness is to spend money on things you won’t get used to,” he says. Here are three examples:
Travel: I’ve written before that it’s better to spend your retirement dollars on experiences instead of assets. After learning about the hedonic treadmill, I understand why. We quickly get used to stuff, but the happiness that comes from experiences sticks with us long after the stuff has gone to the Goodwill. Travel is a great example of a purchase that has a longer happiness shelf life. As Ariely says: “If you’re deciding between a sofa and a vacation, go for the vacation. You’ll quickly get used to the sofa, but the vacation will bring long-lasting memories.”
Learning: Another way to spend your money on things that result in longer-term happiness is to invest in learning. For example, signing up for tennis lessons or learning to play an instrument will likely yield more lasting happiness than if you spent those same dollars on a new flat-screen T.V. Learning something new will keep you challenged and will give you a sense of accomplishment. It will also give you a skill that will stick with you. If you’ve been around here for awhile, you know that we’re big on learning here at Intentional Retirement. Follow along with our learning challenges or start one of your own to boost your happiness quotient.
Relationships: One of the side effects of a stuff heavy life is less time for your spouse, kids, grandkids and friends. How so? Everything we own requires some of our time and money. Columnist Ellen Goodman described it this way: “Normal is getting dressed in clothes that you buy for work, driving through traffic in a car that you are still paying for, in order to get to the job that you need so you can pay for the clothes, car and the house that you leave empty all day in order to afford to live in it.”
Rather than being a slave to your stuff, focus your time and resources on building relationships instead. Go on regular dates with your spouse. Take the grandkids fishing. Go on a guy’s (or girl’s) trip with your friends. Those things cost money, but they will pay dividends for years to come.
How about you? Are you stuck on the hedonic treadmill? If so, think about how you can start spending your money in ways that will actually bring more lasting happiness.
Joe
Note: See Part 1 of the Happiness Series here.
by Joe Hearn | Sep 7, 2012 | Retirement
Earlier this week I noticed that the post counter in my blogging software was about to hit 100.
Since that seemed like something of a milestone, I thought I’d take a quick look back and give you what I think are 10 key posts from the first 100. For those of you who have been with me since the beginning, it will be a good review. For those of you who found us more recently, it will be a chance to read something that you may have missed.
Visit the Archives Page to scroll through the entire list of articles. Also, if you read something that is helpful or encouraging to you, pass it on to a friend. Great ideas spread thanks to people like you.
Thanks for reading. On to the next 100.
~ Joe
by Joe Hearn | Aug 30, 2012 | Pursuits, Retirement
A major problem I have with how retirement is currently practiced in America is that it doesn’t give you enough time.
If you retire at 65 and stay healthy and active until 75 (a stretch for many), then you’ve got 10 years to do everything you’ve been putting off for the last 40. To be blunt, 10 years is not enough.
How can we deal with that problem? The most obvious solution is to start retirement sooner. We don’t do this, though, because in our minds we’ve coupled retirement activities with age, work status, and assets. If we haven’t saved enough or we’re still working, then our dreams stay on the drawing board.
I’m putting the finishing touches on a free guide (you’ll be the first to see it) that will show you how to re-imagine retirement and jettison the idea that it can only start after the retirement party. The guide will be ready soon, but for now, I thought I’d point you to a few articles from the IR Archives that address this issue.
We have quite a few new readers since our London Calling article got exposure on the front pages at Yahoo and MarketWatch, so to many of you the above articles will be new. For the rest of you they’re a good reminder.
Spend a few minutes reading them and then ask yourself this question: “What is one thing that I’ve always wanted to do in retirement that I can actually start doing now?” Maybe there’s something you’ve always wanted to learn or a trip you’ve always wanted to take. There are four months left in 2012. Set a goal to do that one thing before we ring in the New Year. Then once you’ve done it, set a goal to do something else. Why save the best things in life until the very end?
~Joe
by Joe Hearn | Aug 27, 2012 | Happiness, Pursuits, Retirement
When talking with clients about retirement, I almost always hear some variation of the following sentence: “I just want to be happy.”
The more I heard the “H” word, the more I asked myself “What actually makes us happy?”
There’s certainly no single answer to that question. In fact, the answers seem limitless. Not only that, but we don’t seem particularly good at knowing what will make us happy. The things we choose—say, money for example—often provide a short-term, fleeting sense of pleasure rather than a deep, abiding sense of happiness.
With that said, I decided to do a series of posts (300 should do the trick :)) on well researched, quantifiable things that have been proven to make us happy. When I come across a particular fact, idea or action that is likely to make us happy, I’ll write about it.
Happiness Principle #1: Balance Pleasures and Comforts
In his book The Joyless Economy, Tibor Scitovsky argues that there are two kinds of potential experiences in life: pleasures and comforts. By pleasures he means risks or pursuits. These are the new experiences in our lives. The things that get us out of our comfort zone and stimulate our minds. Pleasures include things like meeting someone new, exploring an unfamiliar city, ordering something new off the menu or learning a new hobby or skill.
“A ship is safe in harbor, but that’s not what ships are for.”
~William Shedd
Then there are comforts. These are the things that we know and are used to. They’re safe and predictable. They provide stability. Comforts are things like our home, family, longtime friends and the job we’ve had for years.
“Be sure you put your feet in the right place, then stand firm.”
~Abraham Lincoln
Every day, we’re presented with choices between pleasures and comforts. Left to our own devices we tend to choose comforts. In fact, many times we’re so reluctant to embrace the unknown that we will choose unhappiness over uncertainty. We’ll persist in a bad job or a bad relationship, simply because we’re afraid of what would happen if we didn’t.
Not surprisingly, Scitovsky argues that finding balance between pleasures and comforts will ultimately make us happier than if we have a lopsided tendency toward only one.
Choosing the safe, predictable path (comforts) too often will leave you feeling unchallenged, uninspired and bored. Always taking the risk and stepping outside your comfort zone (pleasures), however, can leave you feeling stressed and unmoored. The key is to find a balance.
So how do we apply this to life and retirement? I certainly don’t have all the answers, but what I have tried to do is lay a solid foundation of comforts that give my family a sense of stability. Our home is not opulent, but it’s comfortable and meets our needs. We have great friends, a church where we feel connected and our daughter is in a good school. In addition, we’ve tried to manage our finances in such a way that we’re not always stressed about money.
What those things do is provide a sort of safety net so we can feel more comfortable (and sure footed) when taking a risk and pursuing pleasures. If we take a risk and it doesn’t work out, the foundation is still there. We can travel and know that we have a warm bed to go home to. We can go back to school (as my wife is doing now) or learn a new skill without feeling like we’re out-punting our coverage. Our daughter can join the soccer team or take up piano lessons and know that she can crash and burn and still have a family that loves her.
How about you? How are you doing balancing pleasures and comforts? Is there an area in your life where you’ve gotten too comfortable and you know it’s time for a change? Has the dogged pursuit of something left you feeling like you’re on shifting sand? If so, spend some time this week thinking about balance and you’ll be well on your way to achieving the happiness that we all look for.
~Joe
by Joe Hearn | Aug 22, 2012 | Income, Retirement
A common rule of thumb is that you can live in retirement on about 70 percent of your pre-retirement income. Should you bank on that? Will you really spend less in retirement? Well, I’ve got good news and bad news.
The good news is, yes, you will spend less in retirement. The bad news? Most people spend less because they have less to spend, not because they couldn’t use the extra income.
Even with the house paid off and outlays on things like work clothes a thing of the past, many retirees still spend the same or more (especially during the first 10 years of retirement) because other expenses go up. Two categories that often increase dramatically are: 1) Travel and recreation and 2) Health care.
So as you plan for retirement, don’t put too much stock in generalities or rules of thumb. Think about what you actually want to do during those years and what your expenses are likely to be. Then put together a well thought out budget that realistically matches those expenses with the necessary income.
~Joe
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