Can You Retire In Your Fifties?

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I recently wrote that most people should plan to work to age 70 before retiring. As a society, embracing 70 as the new full retirement age, would greatly alleviate the forthcoming retirement crisis and reduce the level of poverty in senior citizens. While there are many advantages to waiting until 70, I also see how attractive it would be to retire in your fifties while you are young and healthy.

With enough planning, saving, and advanced preparation you can retire in your fifties. But, retiring at 55 is not the same as retiring at 65. Social Security won’t kick in until 62, and if you read my previous article, you know I suggest waiting until 70. You won’t have Medicare until age 65, so you will need to have your own health insurance coverage, a significant expense which keeps many would-be retirees in the workforce until 65.

I’m going to go through the math of how you might be able to retire in your fifties, and then I’m going to tell you how most fifty-year old retirees actually did it. (Which may disappoint you…)

The “4% rule” suggests that the safe withdrawal rate from a 60/40 portfolio is to start at 4% and subsequently increase your withdrawals for inflation to maintain your standard of living. This research, assumes a 30 year retirement period, such as 65 to 95. If you retire at 50 or 55, it is likely that you or your spouse could live for another 40 or 50 years, especially with continued advances in medical care.

Unfortunately, the 4% rule has a higher failure rate when applied to periods longer than 30 years. That’s because market volatility, especially in the early years of a plan, increases the possibility that an account will be depleted. So, if someone wants to retire in their fifties today, they may need to use an even more conservative withdrawal rate, such as 3%. That way their account will still grow, net of withdrawals, to cope with the inflation that will occur over the next 40 plus years.

Currently, we have record low yields in the bond market, and relatively high valuations (Price/Earnings or P/E ratio) in the stock market. Looking forward, our expected returns should be lower than historical returns. This is another reason why a 4% withdrawal strategy may be too aggressive today for someone who wants to retire in their fifties.

Link: BlackRock CEO says retirement savers should expect returns of as little as 4%.

An alternative to the 4% Rule is the Actuarial Method, which is what the IRS uses for Required Minimum Distributions: you take your current life expectancy and use that as a divisor to determine your withdrawal rate. If you think your life expectancy is 33 years, use 1/33 or approximately 3%.

Then to retire in your 50’s here’s the rule of thumb: at a 3% withdrawal rate, you need your investment assets to equal 33 times your annual withdrawal. For example, if you plan to spend $100,000, you should have at least $3.3 million in your investment portfolio.

This is a pretty high hurdle for most investors. Few people in their 50’s will have accomplished this level of assets, especially if they are still paying mortgages or for their children’s college educations.

The majority of people I know who have actually retired in their fifties have something I have not mentioned: an employer pension. They may have worked for the military, a municipality, school district, or increasingly rarely, a large corporation, and stayed for 25 or 30 years, starting in their twenties. Now in their mid fifties, if they are debt free, it may be possible for them to retire with a pension that pays maybe to 50 to 80 percent of their previous salary. Their taxes will be much lower, so they will actually keep a higher percentage of their pension and there will not be any OASDI or Medicare taxes withheld.

If their pension covers their basic necessities, they can avoid dipping into their portfolio, which can be used for discretionary spending. When the market is up for several years, they can spend a little more on trips or buy a new car. If their portfolio is down, they can hold off on purchases until the market rebounds. And while they may be scrimping by for now, they may get a raise later when they or their spouse become eligible for Social Security. But the key ingredient remains the guaranteed monthly income from their pension.

Link: Scott explains the Government Pension Offset and the Windfall Elimination Provision for teachers and other government employees.

Most of us will not have a pension, in which case, we will need to be very aggressive savers if we are to end up with a portfolio 33 times the size of our annual withdrawal requirements. If you want to retire in your fifties, I can help you do it. It will take years of planning, so the best time to get started is right away.

Is This Amazing Technology A Danger To Your Career?

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Last October, electric car maker Tesla introduced self-driving features into its cars overnight, with a software update installed via wifi. In January, General Motors invested $500 million into car-service Lyft with plans to begin testing driver-less car services for actual customers in one year. Google, Apple, Ford, Toyota and others are racing to produce self-driving cars and we are very, very close to seeing this incredible technology become a reality. Could your next car be an Apple iCar?

Technological change is nothing new, but we may be on the verge of seeing the rate of change increase dramatically, with significant implications for individuals and the economy as a whole. Some of these changes are fairly easy to predict, but there will be secondary and tertiary impacts which will be much more difficult to imagine. And while the changes will be net positive for society, cost savings often come about when jobs which are no long necessary become eliminated.

Self-driving cars will be much safer, virtually eliminating accidents from distracted driving, driver error, fatigue, or drunk driving. Driver-less trucks and taxis will gradually replace drivers, reducing transportation costs. Families will no longer need two, three, or four cars, and many will forgo car ownership altogether, being able to summon a vehicle for the relatively few minutes a day they require transportation. Your newborn child or grandchild may never even have a driver’s license!

Speeding tickets and traffic infractions will decline, creating budget gaps for cities who previously enjoyed significant revenue. Warren Buffett called self-driving cars a “real threat to insurers” like GEICO, which derive substantial revenue from car insurance. As insurance premiums fall for safer driver-less cars, you can expect that premiums for the remaining human drivers will skyrocket as they will quickly become the high risk vehicles on the road.

There are so many positives about driver-less cars that will make our lives better. However, if you are a truck driver, own an auto body shop, work for an insurance company or emergency room, you should expect less demand for your services, reduced revenue, and loss of jobs across your industry. For those individuals, the driver-less car will have the same effect as Henry Ford’s Model T had on carriage makers and buggy whip manufacturers a hundred years ago.

Innovation is great for society and the economy, but can come at a high cost for those individuals who get left behind. Last month, I wrote about the benefits of working until age 70. The greatest challenge for many people will not be their ability or willingness to work until 70, but just keeping their job for that long.

Last year, I met an individual who lost his job of 30 years at age 57 when his employer closed. He wanted to keep working and was not prepared, financially or emotionally, for retirement. However, his skill set was decades out of date. He wanted to hold out for his old salary and was unwilling to relocate or consider jobs that were not near. He looked for a job for three years before officially declaring himself retired at age 60. Now, he has no choice but to start Social Security at age 62 and lock-in a greatly reduced benefit. His retirement will be quite tight, which wouldn’t have been the case had he been able to work and save for another 8-10 years as he had originally planned.

To work to age 70, most folks will have several different careers and will need to continually educate themselves and possibly even retrain entirely if their profession is going to be impacted by innovations such as the driver-less car. Education will become life-long, instead of something which is completed and left behind in your early twenties. There is no doubt that it is a challenge to be a job seeker in your 50’s or 60’s, which is why the best thing for those at risk of job loss is to keep your skills and certifications fresh and to change jobs before you find yourself unemployed.

The two most valuable companies in the world today are Apple and Google, each with a valuation of roughly $500 Billion. That shows the remarkable economic opportunity behind innovation. And Google created that value in less than 18 years! As investors, it’s easy to recognize the growth achieved from new technology. For the sake of your individual financial plan, however, you first need to make sure that you will have an income to save and invest! Consider what are the risks to your career before those risks become a reality.

The Saver’s Tax Credit

Since most employers today no longer provide defined benefit pension plans for their employees, the burden of retirement saving has shifted to the employee. Not surprisingly, saving for retirement is a pretty low priority for the many Americans who are focused on how they are going to pay this month’s bills.

Stop Retiring Early, People!

 

When I was 30, I set a goal of being able to retire at age 50. I’m still on track for that goal, but with my 44th birthday coming up next month, I now wonder what the hell was I thinking. I don’t want to retire. I get bored on a three-day weekend. I need to have mental activity, variety, and the sense of purpose and fulfillment that comes with work. So, no, I won’t be retiring at 50 even if I can.

Funding Your Retirement With Dividends

 

Much has been studied, analyzed, and written about the “safe withdrawal rate” from a retirement portfolio, but unfortunately, there is no withdrawal rate that is guaranteed to work in all circumstances. The interest rates on bonds remains so low today that a portfolio of 60% equities and 40% bonds is almost certainly going to lag its historical return over the next decade. That’s a real danger to anyone who is basing their retirement withdrawals on past performance.

Self Employed? Discover the SEP-IRA.

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The SEP-IRA is a terrific accumulation tool for workers who are self-employed, have a family business, or who have earnings as a 1099 Independent Contractor. SEP stands for Simplified Employee Pension, but the account functions similar to a Traditional IRA. Money is contributed on a pre-tax basis, and then withdrawals in retirement are taxable. Distributions taken before age 59 1/2 may be subject to a 10% penalty.

Social Security: It Pays to Wait

Social Security is a cornerstone of retirement planning. Although financial planners spend considerable time thinking about portfolio construction and sustainable withdrawal strategies, nothing beats Social Security in terms of its lifetime guaranteed income and automatic inflation adjustments. Given the significance of Social Security in retirement, it’s remarkable how many people don’t do any numerical analysis about when to start benefits. There is a strong behavioral bias to start benefits early. In fact, 74% of beneficiaries begin benefits before their Full Retirement Age (66 for those born between 1943 and 1954).

What Do Low Interest Rates Mean For Your Retirement?

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A 2013 study from Prudential considered whether a hypothetical 65-year old female retiree would have enough retirement income to last her lifetime. In their scenario, they calculated a 21% possibility of failure, given market volatility and longevity risk. When they added in a third factor of “an extended period of low interest rates”, the failure rate rose to 54%.

Qualified Charitable Distributions From Your IRA

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For several years, taxpayers have had an opportunity to make Qualified Charitable Distributions, or QCDs, from their IRA. This was originally offered for just one year and then subsequently was renewed each December, an uncertainty which made it difficult and frustrating for planners like myself to advise clients. Luckily, this year Congress made the QCD permanent. Here is what it is, who it may benefit, and how to use it.

A QCD is a better way to give money to charity by allowing IRA owners to fulfill their Required Minimum Distribution with a charitable donation. To do a QCD, you must be over age 70 1/2 at the time of the distribution, and have the distribution made payable directly to the charity.

If you are over 70 1/2, you must take out a Required Minimum Distribution from your IRA each year, and this distribution is reported as taxable income. When you make a qualified charitable contribution, you can deduct that amount from your taxes, through an itemized deduction. The QCD takes those two steps – an IRA distribution and a charitable contribution – and combines them into one transaction which can fulfill your RMD requirement while not adding to your Adjusted Gross Income (AGI) for the year.

The maximum amount of a QCD is $100,000 per person. A married couple can do $100,000 each, but cannot combine or share these amounts. For most IRA owners, they will likely keep their QCD under the amount of their RMD. However, it is possible to donate more than your RMD, up to the $100,000 limit. So if your goal is to leave your IRA to charity, you can now transfer $100,000 to that charity, tax-free, every year.

The confusing thing about the QCD is that for some taxpayers, there may be no additional tax benefit. That is to say, taking their RMD and then making a deductible charitable contribution may lower their taxes by exactly the same amount as doing a QCD. Who will benefit from a QCD, then? Here are five situations where doing a QCD would produce lower taxes than taking your RMD and making a separate charitable contribution:

1) To deduct a charitable contribution, you have to itemize your deductions. If you take the standard deduction (or would take the standard deduction without charitable giving), you would benefit from doing a QCD instead. That’s because under the QCD, the transaction is never reported on your AGI. Then you can take your standard deduction ($6,300 single, or $12,600 married, for 2016) and not have to itemize.

2) If you have a high income and your itemized deductions are reduced or phased out under the Pease Restrictions, you would benefit from doing a QCD. The Pease Restriction reduces your deductions by 3% for every $1 of income over $259,400 single, or $311,300 married (2016), up to a maximum reduction of 80% of your itemized deductions.

3) If you are subject to the Alternative Minimum Tax (AMT). The AMT frequently hits those who have high itemized deductions. With the QCD, we move the charitable contributions from being an itemized deduction to a direct reduction of your AGI.

4) If you are subject to the 3.8% Medicare Surtax on investment income. While IRA distributions are not part of Net Investment Income, they are part of your AGI, which can push other income above the $200,000 threshold ($250,000, married) subject to this tax.

5) If your premiums for Medicare Parts B and D are increased due to your income, a QCD can reduce your AGI.

You can make a QCD from a SEP or SIMPLE IRA, provided you are no longer making contributions to the account. You can also make a QCD from a Roth IRA, but since this money could be withdrawn tax-free, it would be preferable to make the QCD from a Traditional IRA. 401(k), 403(b), and other employer sponsored plans are not eligible for the QCD. If you want to do the QCD, you would need to rollover the account to an IRA first.

Charitable giving is close to our heart here at Good Life Wealth Management. We believe that true wealth is having the ability to fearlessly help others and to use our blessings to make the world a better place. If that’s your goal too, we can help you do this in the most efficient manner possible.

2016 Contribution Limits and Medicare Information

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Inflation was almost non-existent in 2015 due to falling commodity prices. This means that for 2016, most of the IRS contribution limits to retirement accounts are unchanged. Zero inflation creates some unique problems for Social Security and Medicare beneficiaries, which we will explain.

If you are automatically contributing the maximum to your retirement plan, good for you! You need not make any changes for 2016. If your contributions are less than the amounts below, consider increasing your deposits in the new year.

2016 Contribution Limits
Roth and/or Traditional IRA: $5,500 ($6,500 if age 50 or over)
401(k), 403(b), 457: $18,000 ($24,000 if age 50 or over)
SIMPLE IRA: $12,500 ($15,500 if age 50 or over)
SEP IRA: 25% of eligible compensation, up to $53,000
Gift tax annual exclusion: $14,000 per person

Tax brackets and income phaseouts increase slightly for 2016, but there are no material changes. People are still getting used to the new Medicare surtaxes, which include a 3.8% tax on net investment income (unearned income), and a 0.9% tax on wages (earned income). The surtax is applied on income above $200,000 (single), or $250,000 (married filing jointly).

Capital gains tax remains at 15%, with two exceptions. Taxpayers in the 10% and 15% tax brackets pay 0% capital gains, and taxpayers in the 39.6% bracket pay a higher capital gains rate of 20%. For 2016, you will be in the 0% capital gains rate if your taxable income is below $37,650 (single) or $75,330 (married).

For Social Security recipients, the Cost of Living Adjustment (COLA) for 2016 is 0%. We previously had a 0% COLA in 2010 and 2011, and it creates an interesting situation for Medicare participants. Medicare Part A is offered free to beneficiaries over age 65. Medicare Part B requires a monthly premium.

Part B premiums should be going up in 2016, but about 75% of Part B participants will see no change, thanks to Social Security’s “Hold Harmless” provisions. The “Hold Harmless” rule stipulates that if Medicare Part B costs increase faster than Social Security COLAs, beneficiaries will not have their SS benefits decline from the previous year. And since there is no COLA for 2016, any Medicare Part B premium increase would cause SS benefits to negative.

For the past three years, Part B premiums have remained at $104.90 per month. You are eligible for no increase under the “Hold Harmless” rule, if you are having your Part B payments deducted from your Social Security benefit AND you are not subject to increased Medicare premiums under the Income Related Monthly Adjustment Amount (IRMAA).

For most Part B recipients, Medicare premiums are fixed. For higher income participants, IRMAA increases your premium, as follows for 2016:

MAGI $85,000 (single), $170,000 (married): $170.50
MAGI $107,000 (single), $214,000 (married): $243.60
MAGI $160,000 (single), $320,000 (married): $316.70
MAGI $214,000 (single), $428,000 (married): $389.80

If you fall into one of these income categories, above $85,000 (single) or $170,000 (married), you are ineligible for the “Hold Harmless” rule and will have to pay the premiums above, even if this causes your Social Security benefit to decline from 2015.

If you are delaying your Social Security benefits and pay your Part B premiums directly, you are also ineligible for the “Hold Harmless” rule. Finally, if you did not participate in Social Security, for example, teachers in Texas, you would also not be eligible for the “Hold Harmless” rule.