Hey, who wants to retire early? I bet EVERYONE raised his/her hand on that one. Yes, the American dream of retirement has been replaced by a bigger dream -- retiring early. Maybe retiring at 60. Or 55. Or even 50. Wouldn't that be great?
Yes, it would. But once you get to the position where you can retire early, what do you need to do to make sure your retirement goes off without a hitch? This article from Money Central covers that topic, telling you what to do once you have the resources to retire early. Their advice:
Company Funds
Somewhere in all of the paperwork you'll sign before you walk out the door may be a form that asks whether you want your accumulated pension to come to you in one big chunk or in monthly payments. Talk this over with your accountant or financial adviser, because there are a lot of things to consider.
"Annuity payments are steady, which is a positive, and they last a lifetime, but you don't know where you're going to be 15 years down the road," says Robert Doyle, a CPA with Spoor, Doyle & Associates in St. Petersburg, Fla.. "You may have a catastrophic need, and a $500-a-month annuity payment isn't going to help you if you have a $20,000 emergency medical bill. If you take a lump sum, you're in the driver's seat."
Make sure your pension plan deposits that windfall directly into an IRA, though, or you'll get hit with a 20% withholding tax.
A downside of taking a lump sum is that it may sever your relationship with the company's entire retirement plan, including any health insurance that may have been included.
As for monthly payments, there are nearly as many options as there are types of pension plans, so take the time to read the fine print and ask questions. You can take higher payments now and have payments end when you die, or take a slightly smaller amount now and have payments continue to your surviving spouse after your death. Those survivor benefits are usually only half of what you were getting, but they may be better than nothing. Again, read the fine print.
Once your old pension has rolled into your new IRA, you theoretically can't touch it until you're 59 1/2 without paying a penalty and taxes. But that's not exactly true in all cases. You can take some of it out if you become disabled, or to pay certain medical expenses. You can even use it to buy a home or pay for a family member's education. Or you can use IRS Rule 72T, which allows you to set up a monthly payment plan that you commit to for a minimum of five years. It's based on your life expectancy and how much you've got in your IRA, but under the right circumstances, you actually could decide to take out, say, $1,000 a month for five years, without any penalty, as long as you committed to doing it regularly for five years. You'd pay taxes on it, of course, but you would in effect have created your own annuity. Just remember that everything you spend is not going to be available to you later in life.
Social Security
Don't retire too early. Your Social Security payment is based on the average of your best 35 years of work, adjusted for inflation, so if you retire too soon some of those 35 years will be computed as zeros. Let's say, for example, that you started work after college, at age 22. That means you won't have 35 years of earnings on the books until you're 57, and those zeros can put a big drag on your average income. So if you earned an annual average of $60,000 over your best 35 years, your benefit will be computed on that $60,000. If you only worked 30 years and then went to lie on a beach somewhere, your Social Security benefit will be computed as the average of those 30 years at $60,000 plus another five years at a whopping $0. That brings your best-35-years' average down to just over $51,000, which, depending on the age you retire, would cut significantly into your benefit.
Regardless of your retirement age, you can start collecting Social Security at age 62, although you get docked five-ninths of one percent for every month you are younger than 65. That means you'd get 20% less per month retiring at 62 than you would at 65. (That's assuming you were born before 1938, making your full retirement age 65. Full retirement age goes up from there; those born in 1960 or later don't reach the required age until 67. That cuts into monthly benefits even more; you'll find the math on the Social Security Web site.)
Maximum Social Security benefits range from $1,422 per month for someone who retires early at age 62 to $2,111 for some who retires at age 70 -- which might argue for retiring later rather than sooner.
Figure on 3% inflation a year, which means the $50,000 you think you have to live on will only be worth $48,500 next year, $36,871 in 10 years and $27,189 in 20. There's a big difference between living on $50,000 and on $27,189, and it's unlikely that your expenses will be cut in half in that time.
What to do about a Mortgage
So should you pay off the mortgage, or keep making the payments? Like everything else, it depends. After all, the interest you pay on your mortgage is tax-deductible at your regular income tax bracket, so it's probably the best debt you can have. Therefore, go by the old tried-and-true: pay off more expensive debt first, like credit cards or auto loans.
If you still have enough to pay off your mortgage, it's time to compare the after-tax cost of the debt with how much you're making on your investments, Johnson says. If your portfolio is averaging 11%, as the stock market traditionally does, and your mortgage is at 8% before your tax deduction, then leave the money in the market and keep paying the mortgage. "If your investments are sitting in low-yielding money market accounts and your debt is at 10%, pay it off."
Remember, though, that if you're 25 years into a 30-year fixed-rate mortgage, you're paying almost nothing in deductible interest. By now, almost your entire payment is going to principal, which is not tax deductible. "Essentially, you're paying so little in mortgage interest, there's no reason to pre-pay it," Doyle says.
Some people, though, are just more comfortable knowing they own their home free and clear. If that's you and you choose to pay it off, it might be comforting to know that you can get money back out of your house by using a reverse mortgage, in which a lender pays you for a portion of the ownership of your home, or through a home equity line of credit. You also could sell it, of course. But as Doyle says, if you're counting on income from your house when contemplating early retirement, you probably ought to keep working for a while.
"When you retire, your house is your home," he says "Don't look at it as an investment. You can convert it if you need to, but if you're retiring because of the equity in your house, you better get back to work."
The piece goes on from there to give several little tips and "to dos" that will make your time in retirement that much easier. If you're close to retiring early (or even on time or late), you should check out there article. There's sure to be something there of interest for you.
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