When You Retire...

When you retire, how much money do you need to have saved?

 

If there is a million dollar question, or a $4 million, or $10 million, I guess this would be it.  In my personal finance class, a student asked how much money you will need to retire.  We started going through the time value of money equations -present value and future values of lump sums and annuities to calculate how much one would need; which started me thinking long and hard about this questions.  I told my students it was keeping me up at night and this is why it is such a hard question to answer:

1. It depends on when you want to retire.  I asked my class and it ranged from age 45 to never retiring.  The person who retires at age 45 will need a lot more money saved in retirement than the person who never wants to quit working.  I’ve always said, “If you can turn your passions into profit, you never have to work a day in your life.”  I also believe that meaningful work provides you with self worth and increased happiness. So if you love your job, maybe you won’t retire; you may just slow down a little.

 

2. It depends on your lifestyle when you retire.  Experts are saying that you will need 80%-100% of your current income in retirement.  BUT….do you want to cruise the seven seas and stay a five star resorts or do you want to work around the house and live off the land?  There are a lot of retirement calculators on the Internet where you can find out how much money you will need to replace your current income or a percentage of it.  Lately we have been trying to live off the land and it is amazing how much we have saved in groceries.  Even with a small garden and a few chickens, you can save big money, eat better and be closer to your food source.

 

3. What will Social Security and health care cost be in the future?  I don’t know what government plans will be around when I retire, so I’m planning on being self-sufficient.  I would rather have too much in retirement savings then not enough.

Just some figures so you can check to see where you stand with the average American.  According to Gallup’s annual Economy and Personal Finance survey, the average American expect to retire at age 61.  This is up from age 57 when the survey was conducted in 1991. However over fifty percent of the non-retirees age 58-64 expect to retire past the age of 65.  Gallup also found that 61% of Americans are worried or very worried about having enough money for retirement.  The highest percentage of Americans worried about retirement savings is ages 50-64.

This delay in retirement could be due to a change in values, lack of financial resources, uncertainty about future expenses, or decreased mandatory retirement age.  I hope that you find your passions and can turn it into profit. Let us know what you think. 

When do you plan on retiring and how do you envision your retirement lifestyle? 

Image Source: http://www.gallup.com/poll/148058/lack-retirement-funds-americans-biggest-financial-worry.aspx

Maynard

This past Saturday we lay to rest my neighbor’s father. He was a famer, rancher, cowboy, gentleman, and a friend to all. He died doing what he loved doing best, checking on his cows and spraying fences. He was teaching this 50 something city boy professor how to become a farmer and I kind of think he enjoyed seeing an old dog try to learn some new tricks; a desk jockey work a field and get cow sh*t on him.

His untimely death got me thinking about balance and how we live our lives each day. Personal finance is about planning and saving for the future, but it is also about living for today. How do you find balance in your personal finance life? Do you save every penny so you can retire like my roommate from college who just retired after 30 years of teaching? Do you plan on working until you are 70+ and therefore not need so much in retirement to still afford your lifestyle? What do you plan to leave to your heirs? Someone said you lived your life right when the check to the undertaker bounces, meaning you just outlived your savings. Do you agree or disagree?

I hope you all find your passion and that you are able to do what you love to do; that you find balance in your finance goals to support that passion. Personal financial success is your definitions of success, whether it is to retire when you are 53 or never retire. The important thing is to have a plan and be proactive at that plan.

I hope we all find that balance.

- From a green farmer who is happy learning how to work cattle and smell like a famer after a hard day’s work

4th of July Financial Freedom

Today is the 4th of July and time that we celebrate our freedom as Americans and those who have given so much to keep us free. Thank you to all who have served.

The celebration gives us pause to consider our financial freedom. What is your definition of financial freedom? One definition of financial freedom (financial independence) is when your passive income exceeds your expenses. You no longer have to work another day in your life for money as all of your financial needs are met from the income of your investments.

For many of us, we work the greater share of our life to save for retirement – hopefully the point of our financial freedom. Our retirement savings, along with social security hopefully provides enough income that we don’t need to supplement our income with another job.

When you think about retirement and financial freedom, how much money do you need to live the life you want? Are there avenues to reach your financial freedom sooner? Increase your level of investment? Do you have options to reduce spending? (i.e., reduce living expenses and improve your overall health by eating fresh produce from a home garden, using public transportation or riding your bike to work or school). Maybe your financial 4th is sooner than you think. How much do you really need to be happy?

Financial freedom and independence can be reached sooner by saving more, spending less or a combination of two. Can you reduce your spending and increase your savings to reach your financial 4th of July sooner?

Let us know your secrets to reaching financial freedom and happy 4th of July.

Ready for Retirement?

Not ready for retirement yet? You see your net worth decreasing? You are not alone. In fact, retirement may be a dirty word in your household as you wonder how long you are going to have to keep working.

In a new survey released by TD Ameritrade Holding Corporation, one out of every two Americans surveyed were not looking forward to retirement. The Federal Reserve Board’s Survey of Consumer Finances reported Monday that the average American family saw their net worth decrease 39% from 2007-2010. Other statistics show that 69% of the respondents have no specific savings goal. Those that did respond had an average retirement savings goal of $750,000. Only 54% were confident that they would reach their retirement savings goal. What is one to do?

Hopefully, the housing and stock market will bounce back and increase net worth, but that can’t be counted on. One way to increase your net worth so to prepare for retirement is to maximize your 401k plan at work. Make sure you are depositing enough to take advantage of any offered employer match. Try to save at least 10% of your income for retirement in a 401k or an IRA. Take advantage of a Roth IRA and Roth 401k if you think taxes will increase. The Roth allows you to save for retirement on after-tax dollars, but the growth and withdrawals will not be taxed.

Start saving for retirement early in your life. The best time to plant an oak tree was 20 years ago. The next best time to plan an oak tree is today. The same is true with retirement savings. Compounding can make a world of difference in your retirement. If a 16-year-old contributes to a Roth IRA on an annual bases until age 66, he or she would have more than twice the money saved than if waited until age 26 to begin savings. Making annual contributions of $2000 with an 8% return over 50 years would grow to $1,147,540, while the same contributions over 40 years would only grow to $518,113. The extra $20,000 invested in the first 10 years grows to an additional $629,428.

Not ready for retirement yet? You see your net worth decreasing? You are not alone.  In fact, retirement may be a dirty word in your household as you wonder how long you are going to have to keep working.

In a new survey released by TD Ameritrade Holding Corporation, one out of every two Americans surveyed were not looking forward to retirement. The Federal Reserve Board’s Survey of Consumer Finances reported Monday that the average American family saw their net worth decrease 39% from 2007-2010.  Other statistics show that 69% of the respondents have no specific savings goal. Those that did respond had an average retirement savings goal of $750,000. Only 54% were confident that they would reach their retirement savings goal.  What is one to do?

Hopefully, the housing and stock market will bounce back and increase net worth, but that can’t be counted on.  One way to increase your net worth so to prepare for retirement is to maximize your 401k plan at work.  Make sure you are depositing enough to take advantage of any offered employer match. Try to save at least 10% of your income for retirement in a 401k or an IRA.  Take advantage of a Roth IRA and Roth 401k if you think taxes will increase.  The Roth allows you to save for retirement on after-tax dollars, but the growth and withdrawals will not be taxed.

Start saving for retirement early in your life.  The best time to plant an oak tree was 20 years ago.  The next best time to plan an oak tree is today.  The same is true with retirement savings.  Compounding can make a world of difference in your retirement.  If a 16-year-old contributes to a Roth IRA on an annual bases until age 66, he or she would have more than twice the money saved than if waited until age 26 to begin savings. Making annual contributions of $2000 with an 8% return over 50 years would grow to $1,147,540, while the same contributions over 40 years would only grow to $518,113.  The extra $20,000 invested in the first 10 years grows to an additional $629,428.

Increasing your net worth and being prepared for retirement takes discipline and sacrifice.  Having the long-term vision of the future growth and your financial well-being helps to ease the pain of the sacrifice and can help increase your strength to save.

Look Who’s Trying to Collect from Beyond the Grave

What happened to your debts when you die? As seniors increase their debt during retirement, you should know what happens to debts when you die.  According to FoxBuisness.com “Nearly 40% of all seniors say they have accumulated debt in their retirement years with no plans to pay it off in their lifetime.  Are the heirs and next of kin responsible?

There is not an easy answer and it all depends on the situation.  The first thing to do in all cases is to notify all creditors of the death. Normally, the estate and the executor who handles the estate will liquidate the assets, pay creditors and distribute the proceeds according to your last will and testament or it will be distributed according to state laws.

If there is not enough money to pay all creditors, the general order of who gets their money is:

1.  Funeral expenses, taxes and administrative fees

2.  Secured creditors such as mortgage loans, car loans, etc.  These creditors have the rights to the assets securing the loan.

3. Unsecured creditors…if there is any money left.  If there is no money left, the creditor will contact the co-signer and the co-signer is legally responsible for the debt.  If the debt was just in the deceased name, most credit card companies will write off the debt.

 

However, more and more credit card companies are outsourcing their collections and contacting the next-of-kin trying to collect based on “moral obligation.”  Saturday’sWall Street Journal has an article describing how collection firms are targeting survivors to try to collect at least some of the debt.  According to this article, “Collectors are starting to realize just how much money you can get from someone when they are at their most vulnerable.” Many survivors pay some or all of the debts just to stop the collectors from calling and bringing on recent memories of the deceased, even though they are not legally obligated to pay.

Here are some of the facts you should know:

• The Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 prohibits creditors from charging late fees or annual fees during estate settlement.
• Not all monies are available to creditors.  Retirement accounts such as 401(k)s and IRAs don’t pass through the estate, but go directly to the beneficiary.
• Under the FairDebt Collection Practices Act , collectors cannot do the following:
•  Call before 8:00 a.m. or after 9:00 p.m.
•  Call at work if you ask them not to
• Harass you, use obscene or profane language or threaten the use of violence or other criminal means to harm you, your reputation, or your property
•  Conceal his or her identity on the phone
• Lie or falsely imply that you have committed a crime
• Disregard a written request from you to cease further contact
• Falsely represent the amount, character or legal status of debt
• Continue to contact you if you ask them in writing to stop

If you feel you are being harassed, contact your state’s Attorney General’s office and the Federal Trade Commission with the details of the phone call or harassing activity.  You may not be liable for the debt and you have rights to keep you from being harassed.

To Convert or Not Convert the IRA

This was the year long debate in our household. In 2010, the federal government dropped the income limit for moving savings from a traditional to a Roth IRA. Additionally, you had a one-time option to pay taxes on the current value of the converted funds over a two-year period. The converted asset then grows tax-free.

To get this tax break off any future earnings of the converted funds, you have to pay income tax on the value of the funds moved.

From Kelly Greene's Wall Street Journal article on 9.30.2011, "The federal government allows the tax-law equivalent of a do-over, says Maria Bruno, an investment analyst at fund giant Vanguard Group, whose customers converted more than 230,000 traditional IRAs to Roths last year, and which has processed 3,900 do-overs this year, as of Monday."

We are one of the 3,900 who converted back. This was a highly contested move in our household. Bob is sure with the current level of the national debt, that by the time we withdraw the retirement savings, we will be under the burden of a significantly higher tax rate. Kristy is pretty convinced we most likely will never retire so it will be a tax that our kids can cover when inheriting the asset. In the final hours.... Kristy won.

Investors who transferred traditional IRA holdings to a Roth in 2010 can move the funds back to a traditional IRA and avoid the tax up to October 17th. If you filed your 2010 tax returns already, you can amend them. We amended our tax returns last month. The weight of such an extra-large tax payment, even spread across a two-year time line seemed insurmountable to Kristy, given our number of other more short-term, family goals.

There were multiple steps to "reconvert", a waiting period, and then the "recharacterize" of the account as a traditional IRA. Calls to our tax advisor, calls to the IRA custodian...

The downside? We lose the one-time option for 2010 conversions of getting to spread the income involved across two tax returns. We lose out on the possible tax-free earnings of the converted fund. Up-side? Significant less tax to pay over the next two years.

Who was right? We will let you know in 30 years.

What is it Going to Take to Retire?

In reading the Sunday, September 26th Cedar Rapids Gazette, there was an article “From Boom to Bust” by Susan Tompor that got me thinking what it would take for me to retire. Susan also wrote the article “How to Prepare for Retirement” to help you plan. One of the things she stated in her “How to Prepare” article is “that you want to spend 4 percent or less each year from your retirement saving.” So….how much is it going to take? Other experts say that you will need 80-100 percent of your pre-retirement income in retirement.

If we put together all of this, and for ease of numbers, say you make $100,000 before you retire, you want 100 percent of your pre-retirement income, and you are only going to spend 4 percent of your retirement per year, you would need $2.5 million in retirement savings.

Now this does not include your Social Security income. Right now, you can start collecting Social Security at ages 62, but if you want to receive your full Social Security benefit, you must wait until you are 67. It might be earlier deepening on your ages. You can check what you will receive from Social Security at http://www.ssa.gov/.

All I can say is that I’m really glad that I have a job that I love and that it is a secure job. I don’t know when I will actually retire or if I will just slow down and travel more. It’s good to know your retirement numbers; no matter how scary they look so you can plan. A favorite quote of mine as it relates to retirement savings is “The best time to plant an oak tree is 20 years ago. The next best time is today.”

Live-Save-Give

As the New Year begins, it is time to reevaluate budgets, investments and giving. On Saturday, January 2nd we were driving and listening to one of our favorite money broadcast: Marketplace Money. They had an article about the Fifty Percent League that made us rethink our giving. As Marketplace Money states: “The Fifty Percent League is made up of people who believe it’s their moral obligation to give away as much of their money as they can.”

We believe in the 80-10-10 rule where you live on 80% of your income, save 10% of your income and give away 10% of your income. This Saturday was the first time we heard about the Fifty Percent League and it made us question if we were giving enough to the causes we believe in.

The article interviews Pilar Gonzales, who only makes about $35,000 but gives away at least twenty-five percent of her income. Even though she does not make a lot of money, she has placed her priorities in helping others and is living out her values.

No matter how much or little you make, you can make a huge difference in other people’s lives by giving of your time, talents and financial resources. As you make your New Years Resolutions, are you living out your values with your time, talents and money? We invite you to listen to their story.