Get your dreams off the drawing board

Get your dreams off the drawing board

To get your retirement dreams off the drawing board, you need a combination of ideas and execution.  Having one without the other is pretty much useless.  In his recent book “Anything You Want,” Derek Sivers discussed this concept in relation to starting a business, but it can just as easily be applied to your retirement.  From his book:

“To me, ideas are worth nothing unless they are executed.  They are just a multiplier.  Execution is worth millions.

Explanation:

AWFUL IDEA = -1
WEAK IDEA = 1
SO-SO IDEA = 5
GOOD IDEA = 10
BRILLIANT IDEA = 20

NO EXECUTION = $1
WEAK EXECUTION = $1,000
SO-SO EXECUTION = $10,000
GOOD EXECUTION = $100,000
GREAT EXECUTION = $1,000,000
BRILLIANT EXECUTION = $10,000,000

To make a business, you need to multiply the two components.  The most brilliant idea, with no execution, is worth $20.  The most brilliant idea takes great execution to be worth $20,000,000.”

As I said earlier, this “Ideas x Execution = Payoff” equation can be applied to your retirement.  The payoff in retirement usually takes a different form—happiness, fulfillment and adventure rather than dollars—but you get the point.  A good idea that is well executed results in a big payoff.  A good idea with weak execution “pays off” with regret.

So as you plan for retirement, absolutely dream big and have a vision for your life.  Just don’t forget how important it is to have a strategy to turn those plans into reality.  Dreaming without doing is a recipe for disappointment.

Thanks for reading.  Have a great week!

Joe

How to minimize taxes in retirement

How to minimize taxes in retirement

Update:  Before jumping into today’s article I wanted to give you an update on the learning post from last week.  It must have struck a chord with the IR community (who, like those from Lake Wobegon are good looking and above average), because it was the most read and forwarded article on the site to date.  If you enjoy learning new things, follow along with the challenges as we go and you’ll have plenty of things to talk about at the next cocktail party.

With the current challenge I’ve memorized the Americas, Europe and Africa.  A good start, but there are a lot of countries in Asia and Oceania that will be challenging.  With that update, let’s move on to today’s post, which is an article that I wrote for the Financial Planning Association.  With tax time upon us, I thought many of you would find it helpful.

 

As April 17 (you have two extra days this year) rapidly approaches, people all across the fruited plain are sharpening their pencils, firing up their calculators, and figuring out what, if anything, they owe Uncle Sam.  For all the ink spilled lamenting the complexity of the tax code, doing your taxes during your working years is a pretty straightforward task for most people.  Just add up what you made, subtract any allowable credits or deductions, and then grab your checkbook.

The process is similar during retirement, with the exception that you have greater control over your income, which means greater control over your tax bill.  That control means you can stretch your nest egg further by making good distribution decisions.  With that in mind, here are five ways to minimize your tax bite during retirement.

Know which accounts to access first

The money you’ve saved for retirement is likely held in different types of accounts that are taxed differently.  Some accounts are fully taxable, while others, like traditional IRAs, defer taxes until you withdraw the money.  Still other accounts, like Roth IRAs, may be free from federal taxes altogether.

Which accounts should you tap first?  A good rule of thumb is to take money from your taxable accounts first.  This will allow the money in your tax deferred accounts to continue compounding.  Access tax-free accounts last.

One exception to the rule of thumb might be if you are in a lower tax bracket now and anticipate that you will be in a much higher tax bracket in the future.  In that case, you may want to begin taking distributions from your tax-deferred accounts earlier.  In any event, work closely with your tax and financial advisers each year to make distributions decisions that make the most sense for your specific situation.

Minimize taxes on Social Security

If Social Security is your only source of income, chances are that you will not need to pay taxes on those benefits.  If you have other income sources, however, you may need to pay taxes on a portion of your benefits if your modified adjusted gross income (MAGI) plus one-half of your Social Security benefits exceeds what the IRS calls the base amount for your filing status.

For example, if your MAGI plus one half of your Social Security benefits is between $32,000 and $44,000 (for those married filing jointly) in 2012, you may need to pay taxes on 50 percent of your Social Security benefits.  If your income exceeds $44,000, you will likely need to pay taxes on 85 percent of your Social Security benefits.  Armed with this knowledge, it’s easy to see how a poorly timed IRA distribution or acceptance of some part-time work during retirement can impact your tax bill in a given year.

Relocate to a tax-friendly state

Different states tax things differently.  Consequently, where you decide to live during retirement is no small decision when you think about the various types of taxes that you pay (e.g. income taxes, Social Security and Medicare taxes, capital gains taxes, dividend taxes, property taxes, sales taxes, estate taxes and inheritance taxes).  If a particular state is willing to cut you a break in one or more of these areas, it is worth factoring that into your decision making.

For example, do you plan on working at least part time during retirement?  There are seven states that do not impose personal income taxes.  Will most of your income be from Social Security?  Thirty-six states don’t tax Social Security benefits.  Do you anticipate a free-spending retirement?  There are five states with no sales taxes.  Do you have a pension?  Ten states don’t tax federal, state and local pension income.  Before deciding where to live, inventory your income streams and decide which state will allow you to keep more of what you make.

Consider tax-free bonds

Municipal bonds are issued by states or municipalities and are usually exempt from federal taxes.  They may also be exempt from state and local taxes if you live in the state that is issuing the bond.  This preferred tax treatment along with their historically low default rate make municipal bonds a staple in many peoples’ retirement accounts.

Take advantage of Net Unrealized Appreciation (NUA)

If you own highly appreciated company stock in your 401(k) or other employer sponsored plan, you should review your options carefully before rolling that money into an IRA when you retire.  That’s because tax law permits you to distribute those shares from your 401(k) and pay income tax on the basis (your original purchase price) of the shares while continuing to defer the taxes on the unrealized gains.  Once the stock is eventually sold, you will only pay capital gains taxes on the difference between your basis and the sale price.  If, however, you roll all of those shares into your IRA at retirement, you will pay ordinary income taxes on the entire amount when you eventually distribute it from your IRA.

This strategy might be particularly appealing to someone in a high marginal tax bracket who currently pays income taxes at a much higher rate (35 percent) than capital gains taxes (15 percent).

Unfortunately, your tax bill doesn’t retire when you do, but there are actions you can take to minimize what you owe.  By working closely with your advisers, you can maximize your income and increase retirement security.

How (and why) to be a lifelong learner

How (and why) to be a lifelong learner

Show me someone who loves to learn new things and I’ll show you someone who will most likely have an interesting, rewarding retirement.  Why is that?  Learning comes with a host of benefits like:

  • It keeps your mind sharp
  • It keeps you engaged with advances in society (Congrats to my mom on buying her first iPad!)
  • It helps you figure out what you like
  • It helps you discover new things
  • It gives you new people to interact with
  • It gives you something fun to do with your spouse or significant other
  • It provides personal satisfaction and a sense of accomplishment

And when I talk about learning, I’m not talking about learning in the traditional, sometimes boring sense of the word (e.g. What year did the Spanish-American War start?), but in the fun, practical, interesting sense of the word (e.g. How do you scuba dive?).  In other words, pursuing knowledge and experiences that enrich your life.

How about you?  Do you like to learn new things?  I love to learn.  In fact, every year I pick one or two things that I’d like to know more about and spend time learning all I can about them.  In years past this has included things like:

  • Learning to play chess (to play me search for joe hearn on Chess With Friends)
  • Learning to play the guitar
  • Learning how to run a marathon (and then running one)
  • Learning how to make a great omelet (hint: get the right pan)
  • Joining a Master’s (a.k.a.: Old Man’s) swim club
  • Taking cooking classes with my wife
  • Get my motorcycle license
  • Taking a travel photo workshop

One of the great things about our world today (besides the Snuggie) is that self learning (also known as Autodidactism) is easier than ever.  Gone are the days when you need an expensive education or lengthy apprenticeship just to learn more about something that you find interesting.  Now you can just sit down on your own time and access a plethora of resources, tools, apps, books, and videos on just about any topic that interests you.

Take photography for example.  For less than $1,000 you can have a camera that is head and shoulders above anything that Ansel Adams ever had.  The store you buy it from will likely offer free “Get to know your new camera” classes so you can learn how to use it.  To learn how to take better pictures you can download (for free) The Art of Photography podcast on iTunes.  Then you can edit and improve all those great new vacation photos you take using something like iPhoto or Snapseed (available in software and app form).

30 Day Learning Challenges

As you can tell by the name of my blog, I think being intentional is one of the most important things in life.  Everyone has ideas, plans and dreams, but those never really become reality unless you intentionally make them happen.

With that in mind, I thought it would be fun to do periodic “challenges” where I intentionally learn about something that interests me and then write about it here at the blog.  And of course, if the topic interests you, you are more than welcome to follow along at home and pick up a new skill as well.

Some of those things I can probably learn to do in 30 days (like how to make a good omelet).  In those cases, I’ll write about the topic, why I want to know more about it, the tools I used to learn about it, what I was able to learn after the 30 days and a plan you can follow to do the same thing.

In other cases, it will take much longer than 30 days to learn something (learning to speak a second language, for example).  In those cases, I will spend the 30 days learning everything I can about how best to teach yourself that skill.  Then I’ll write about what I learned and try to give you a road map to follow if you’re interested.

In either case, the idea is to become intentional learners through a combination of reading, researching, asking experts, experimenting, practicing and improving.  Sound fun?

The first challenge

The first thing I’ll be doing is a smaller challenge, but something I’ve always wanted to know.  I would like to be able to locate every country in the world on a map.  You may remember the painful video a few years ago of the Miss Teen USA contestant explaining why most “U.S. Americans” can’t find the United States on the map (If not, you can watch it here).

I chuckled at that video, but in reality, my knowledge of world geography is nothing to write home about.  If you asked me to find places like Suriname or Macedonia, I’m not even sure I could get you on the right continent.  For someone who loves to travel and eventually wants to visit most of the countries in the world, that geographical ignorance will not abide.

So in the next 30 days, I will learn how to locate every country in the world (about 195 depending on how you count) on a map.  To do this, I will be using an app from Brainscape called Learn Geography.  The app uses a scientifically optimized algorithm to repeat flashcards in just the right pattern so that your brain will absorb the information.  I’ll be learning the countries one continent at a time and in 30 days I’ll report back to you on how I did.  If that sounds like something that interests you, I’d love to have some of you follow along as well.  Just download the app from the App Store and get started.

Don’t worry if this challenge doesn’t interest you.  I’ll make a list of some of the other ones I’m considering below and I’ll be adding new ones all the time.  Hopefully, something on the list will pique your interest (or absolutely feel free to suggest something to me) and we can channel our inner Polymath and learn something fun together.

  • How to plan an around the world trip
  • Learn video and photo editing software
  • How to tell a great story
  • How to play tennis
  • Gardening
  • How to simplify/declutter my house
  • Scuba diving
  • Learn about particular foods (coffee, beer, wine, olive oil, etc.)
  • How to snowboard
  • How to make great croissants
  • Photography
  • How to pack light for a trip
  • How to hike and camp (e.g. navigating with a compass, starting a campfire, backwoods first aid, planning a hike, etc.)

Thanks for reading!

Joe

One small change that will produce huge results

One small change that will produce huge results

The question I’m asked most frequently by clients about their retirement is this:

“Will I have enough?” 

If baby boomers are losing sleep over an issue, that’s it.  And I don’t blame them.  There’s a lot hanging on the answer to that question.  Having enough means freedom, opportunity, peace of mind, and independence.

So how can you improve your chances of success?  A few years back the mutual fund company Putnam and the data firm Lipper did a study on that very topic.  They measured the impact of changes in several key variables like asset allocation, fund performance, and contribution rates.

Rather than bore you with the details, I’ll just share one conclusion.  The variable that had the greatest impact by far was how much a person saved.  In fact, increasing savings rates from 2 percent to 4 percent had 90 times (90 TIMES!) the impact of being able to perfectly pick the best performing mutual funds.

So if you want to make a small change today that will have a huge impact on your retirement security, get online or call your HR department and increase the percentage that you’re contributing to your 401(k) each month.  The change will take five minutes, but will have more impact than anything this side of winning the lottery.

Thanks for reading.  Have a great weekend!

Joe

 

Abe Lincoln’s favorite poem

Abe Lincoln’s favorite poem

Happy President’s Day!  I learned recently that President Lincoln’s favorite poem was “Mortality” by William Knox.  For me, the poem is a great reminder for how quickly life goes by.  As Knox says: “’Tis the twink of an eye, ‘tis the draught of a breath, From the blossom of health to the paleness of death.”

In my book The Bell Lap, I introduced a concept I call the “Someday Window.”  Retirement is often viewed as a time when you will do everything you didn’t have time to do while you were working, raising kids, and generally focusing on other priorities.  Year after year, you tell yourself “someday” this and “someday” that.  If a person retires at sixty-five and lives until seventy-five, he or she has a ten year Someday Window.  The clock is ticking.

The takeaway from that concept is simple: We should all begin treating today like the someday we were planning for yesterday.  So in memory of Honest Abe on this President’s Day and as a reminder to live your life to the full, I give you “Mortality” by William Knox.

(P.S. I drew twenty names from the Valentine’s contest entries.  I will email the winners later today and the books will go out in the mail tomorrow.  Thanks to everyone who participated!)

Mortality by William Knox

O why should the spirit of mortal be proud!
Like a fast flitting meteor, a fast flying cloud,
A flash of the lightning, a break of the wave –
He passes from life to his rest in the grave.

The leaves of the oak and the willows shall fade,
Be scattered around, and together be laid;
And the young and the old, and the low and the high,
Shall moulder to dust, and together shall lie.

The child that a mother attended and loved,
The mother that infant’s affection that proved,
The husband that mother and infant that blest,
Each — all are away to their dwelling of rest.

The maid on whose cheek, on whose brow, in whose eye,
Shone beauty and pleasure — her triumphs are by:
And the memory of those that beloved her and praised,
Are alike from the minds of the living erased.

The hand of the king that the sceptre hath borne,
The brow of the priest that the mitre hath worn,
The eye of the sage, and the heart of the brave,
Are hidden and lost in the depths of the grave.

The peasant whose lot was to sow and to reap,
The herdsman who climbed with his goats to the steep,
The beggar that wandered in search of his bread,
Have faded away like the grass that we tread.

The saint that enjoyed the communion of Heaven,
The sinner that dared to remain unforgiven,
The wise and the foolish, the guilty and just,
Have quietly mingled their bones in the dust.

So the multitude goes — like the flower and the weed
That wither away to let others succeed;
So the multitude comes — even those we behold,
To repeat every tale that hath often been told.

For we are the same things that our fathers have been,
We see the same sights that our fathers have seen,
We drink the same stream, and we feel the same sun,
And we run the same course that our fathers have run.

The thoughts we are thinking our fathers would think,
From the death we are shrinking from they too would shrink,
To the life we are clinging to they too would cling —
But it speeds from the earth like a bird on the wing.

They loved — but their story we cannot unfold;
They scorned — but the heart of the haughty is cold;
They grieved — but no wail from their slumbers may come;
They joyed — but the voice of their gladness is dumb.

They died — ay, they died! and we, things that are now,
Who walk on the turf that lies over their brow,
Who make in their dwellings a transient abode,
Meet the change they met on their pilgrimage road.

Yea, hope and despondence, and pleasure and pain,
Are mingled together like sunshine and rain;
And the smile and the tear, and the song and the dirge,
Still follow each other like surge upon surge.

‘Tis the twink of an eye, ’tis the draught of a breath,
From the blossom of health to the paleness of death,
From the gilded saloon to the bier and the shroud –
O why should the spirit of mortal be proud!

The problem with delayed gratification

The problem with delayed gratification

Delayed gratification is great if it’s allowing you to work toward something.  For example, saving for that trip you’ve always wanted to take or giving up that extra hour of sleep so you can make it to the gym.  You’re giving up something good now in order to get something better later.

Where delayed gratification becomes a problem is when it is used as an excuse for life avoidance.  Rather than allowing you to work toward something, it is keeping you from something.  Sure, it’s hard to decide what you really want out of life.  It’s risky to pursue big goals.  Rather than rising to the challenge, we tell ourselves we need a little more time or a little more money.  Not yet, but soon.  Someday.

Here’s the thing.  The longer you wait, the less you believe yourself when you say “Someday.”  Your dreams begin to atrophy.  Your opportunities begin to vanish.  You aim lower.  You talk yourself out of things.  Before you know it, it’s too late.

If you’ve been around Intentional Retirement for awhile, you’ve seen the quote from Mark Twain below.  Your biggest regrets in life will be the things you didn’t do.  So don’t delay.  Decide what you really want out of life and get after it.  Start small if necessary, but start.