Thinking About Retiring Early? Things to Consider…Part 2

Welcome back for the second part of “Thinking About Retiring Early? Things to Consider”. Last month’s post focused on what happens to your income when retiring prior to the more common retirement ages of 55, 59 ½, 62, etc. This month will focus on how expenses are impacted when you decide to retire before you reach one of the ages mentioned above.

Historically speaking, “average” retirees may need approximately 80% of their pre-retirement income to maintain their current standard of living. The rationale behind this theory is that you will no longer have to pay for things like commuting, work attire, payroll taxes, certain employer-sponsored benefits, etc. While this may seem like a plus, things get a little tricky when you are looking to retire decades earlier than normal. Many retirees already have a difficult time stretching their funds over the course of a 20-year retirement (depending on your anticipated life expectancy) and tacking on another 20 years will only add to the complexity. This is primarily due to the additional estimation required in the retirement planning process, but also because of healthcare.

Managing the cost of healthcare

According to recent statistics from the Centers for Medicare and Medicaid Services, National Health Expenditures grew nearly 10%, or approximately $12,500 per person, in 2020 (partially due to the Covid-19 pandemic), and are projected to grow at an average annual rate of 5.4%, which outpaces inflation in most years. The problem for early retirees is that some of those costs are currently subsidized through their employer and/or the federal government; they will likely lose that subsidy with an early retirement. One option is the Healthcare Marketplace; however, eligibility for subsidies is impacted by income. The Health Insurance Marketplace Subsidy Calculator from the Kaiser Family Foundation can help to estimate your premium costs.

Whether you want to retire early or not, please remember that the decision is very personal, specific to your individual needs, and should not be based upon general guidance or the decisions of others. To learn more about the basics, visit our website at https://www.extension.iastate.edu/humansciences/money.

Ryan Stuart

Ryan is a Human Sciences Specialist in Family Wellbeing and an Accredited Financial Counselor®. He focuses on educating and empowering all Iowans to independently make positive financial decisions throughout their life course.

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Thinking About Retiring Early? Things to Consider…Part 1

This is not a new phenomenon, but the Financial Independence, Retire Early (FIRE) Movement gained quite a bit of momentum over the past few years. As the pandemic raged on, many people started to question their quality of life, workplace satisfaction, and their connection to family, friends, and the outside world in general. For most of us, this was a normal reaction to an extremely stressful situation; however, a handful throughout society decided they had had enough and hit the road for greener pastures.

Depending on which article you read on the internet (there are hundreds!), this may sound like a reality anyone can achieve, but I noticed quite a few details were either left out or not applicable to the general population. In order to cover this topic in full, I decided to break it up into two posts – one focusing on income, and the other focusing on expenses – so if you are thinking about retiring early…read on!

Income…. Where will it come from now?

News flash – your cash flow will be significantly impacted by retiring early. Gone are the days of receiving a regular paycheck from an employer. So, how do people make it work when we think of the typical “early retirement” age as 59 ½ or 62 (for Social Security purposes)?

  1. For starters, it is a little-known fact that there are MANY ways to retire before the age of 59 ½ without being hit with the dreadful 10% tax penalty, but you must qualify for it.
  2. You may read that some FIRE-achievers received severance packages, inheritances, own rental properties, and/or save upwards of 75% of their income (primarily in taxable brokerage accounts).
  3. And most importantly, many continue to work. Unlike their previous career, however, they typically work part-time through the gig/freelance/app economy, and/or their new work finally enables them to follow a passion.

Come back next month for the discussion on expenses (hint: it has a lot to do with the cost of healthcare!).

Ryan Stuart

Ryan is a Human Sciences Specialist in Family Wellbeing and an Accredited Financial Counselor®. He focuses on educating and empowering all Iowans to independently make positive financial decisions throughout their life course.

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Make the Most of Financial Literacy Month

April is Financial Literacy Month! This annual event reminds us ALL that we are never “done” with financial literacy. The world changes, financial products change, and our own needs change — that means we always need to keep learning about financial topics.

What do you want to learn more about when it comes to finances?

  • Is buying a home on your radar sometime in the next few years?
  • Do you need a retirement checkup to see if you are on track to meet your goals?
  • Do you want to start saving for your children’s education after high school?
  • Are you having trouble keeping up with your daily-weekly-monthly financial challenges?

Set a goal NOW to take steps toward being the informed consumer and financial manager you want to be! See below for ideas that will help you address the four questions above. And subscribe to MoneyTip$ to make sure you get ongoing reminders and updates on financial topics.

Remember that financial literacy is not just for young people, or for people who don’t know how to manage their money. Financial literacy is an ongoing topic for EVERYONE!

Ideas to help with the questions above:

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Are Annuities Good For Everyone?

After reading through previous blogs to help brainstorm for this week’s post, I found myself reflecting upon personal experiences that led me down the path to becoming a Financial Counselor. One such instance – that admittedly, I did not fully understand for several years after entering this profession – occurred when my father retired ten years ago.

He only had a small sum of money in his company’s 401(k). This was completely fine considering he also had a pension, Social Security, and little to no debt. In this situation, he received more than enough money from his “guaranteed” sources of income – the pension and Social Security – to cover his necessary living expenses and could use his 401(k) as a flexible source of income, if needed. This is ultimately what my mom did last year when she retired, but unfortunately, this is not what happened with him…

Like many families, my parents worked with an advisor at a local, for-profit financial institution. They ultimately decided to roll his 401(k) into a Traditional IRA that also included the following:

  • A deferred-annuity contract that allowed him to annuitize (turn the money into a lifetime stream of income) or pay a surrender fee if he later changed his mind – he did.
  • It offered a guaranteed 5.5% rate of return on the base amount of the rollover and a guaranteed death benefit; however, each of these “riders” cost 1.25%, which was deducted annually from his IRA balance.
  • The IRA balance was invested in four different mutual funds, all of which had an expense ratio over 1.0%.

Did he lose money because of this? Technically, no – last decade’s market return was quite impressive; however, those annual fees were costly for a financial product he never used. Am I judging my family, or their advisor’s decision? NO!! I was not a part of the conversation and do not know what factors played into it. My only goal here is to provide education on a very complex, and specific, financial product and how it should fit in to a retirement plan. You can also read this AARP article for a much more detailed summary on annuities.

Ryan Stuart

Ryan is a Human Sciences Specialist in Family Wellbeing and an Accredited Financial Counselor®. He focuses on educating and empowering all Iowans to independently make positive financial decisions throughout their life course.

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Time to Check Beneficiary Financial Accounts/Retirement

A former colleague shared with me about her experience after retirement. It is crucial to make sure all documents and financial accounts are updated due to changes in life. Like annual medical checkup, a date and time of the year to review documents can reduce stress for everyone involved. Below is what my colleague learned and guide to action to take.

Lesson Learned:  Recently my father died, He had a will regarding his property, In the process of settling his estate, we found two financial accounts that did not have an identified beneficiary.  One account was under $100,000 and the other one account was almost $200,000. Both accounts were in financial institutions.

Now, I knew that his estate needs to go into probate that takes time. (6 months or more to settle.) You need to involve a lawyer to make it happen.

Why it is important to check beneficiaries?  Things Happen. There is change, Divorce, Death, new family members are a few of the examples.

Recently, my retirement account asked me to clarify my beneficiary on the account.  It does not have a lot of funds but, after the experiences mentioned before, save yourself trouble and time by checking your beneficiaries. .

Jeannette Mukayisire

Brenda Schmitt

A Iowa State University Extension and Outreach Family Finance Field Specialist helping North Central Iowans make the most of their money.

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Teachable Moments

I enjoyed a story shared by a gentleman who as a teen loved the challenge of rolling into a gas station with barely a drop of gas left in his tank…despite the warnings of his father, “be sure to keep at least a quarter tank of gas in the car.” Thirty years later, as he passed through a very rural area of Iowa, the gas pump on his car left him stranded for a couple of days while he waited for the delivery of a new one. When he asked the mechanic what he could do to prevent this in the future, he learned that keeping at least a quarter tank of gas in a car prevented the pump from having to work so hard. 

Seventeen years ago, when I first learned to prepare taxes at a VITA site, I was blessed to have two very good mentors…one was retired from the IRS and the other was retired from the department of Social Security. Each year, during the two and a half months we were together preparing returns, there were opportunities for rich discussion where they would share with me, what they would have done differently, regarding finances and investing, had they known what the know now, in retirement. 

Preparing tax returns for others has been a rewarding experience and is an opportunity to share information with individuals at a “teachable moment”; when they are most ready to receive, hear and apply information that can change their lives. Obviously, as an adult, a broken gas pump creates a greater teachable moment compared to his teenage self, listening to a nagging parent. But learning a financial lesson AT THE TIME of retirement doesn’t leave much time to apply and benefit from a lessons learned.

At my free tax sites, I see individuals who make money “on the side” who are paid in cash and want to omit the income from their tax return. One immediate consequence to this action might be a loss of Earned Income Tax Credit. But what they fail to see is the long-term consequence.  While it may feel good to have income that you did NOT pay taxes on, not reporting it is illegal AND affects the amount of your Social Security check in retirement which is based on your 40 highest quarters of income.

Brenda Schmitt

A Iowa State University Extension and Outreach Family Finance Field Specialist helping North Central Iowans make the most of their money.

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Transition to Retirement

Guest Blogger Sandra McKinnon

As a family wellbeing specialist, I have always been interested in preparing for retirement and helping people answer the question – will I have enough money to retire? However, the decision to retire is not just about finances.

A retired family friend pointed out that health is also an important factor to consider. And I remember my grandfather saying to me, “just don’t grow old.” At the time, at my young age, I didn’t know what he meant, but I understand better now.

Research shows when people can afford to retire and are healthy enough to enjoy it they are much happier in retirement. Nevertheless, there are other issues to consider as we approach the milestone event of retirement.

A study featured in the Harvard Business Review in January 2019 looked at how retirement changes our identity. Our work and identity are closely knitted. When we retire we need to think about how to handle that separation for our mental and emotional health. The study found retirees go through two main processes.

One process is life restructuring. Before retiring, think about where you spend most of your time, what you do with your days and the relationships in your life. Working is an important structure in our lives, framed by the expectations of the organization we work for; many of us have been working in this structure for years. Once we retire, we will approach our day, our life, differently. The researchers suggest giving attention to two areas: detaching from work, and giving yourself freedom and flexibility.

The other process is identity bridging. This means to maintain or enhance an important aspect of yourself that existed before retirement. This could mean spending more time in relationships (as a spouse, friend, or grandparent), re-engaging in creative activities or joining groups you once enjoyed, volunteering or starting a consulting business.

Transitioning to retirement can take a while. Give yourself the time to think through what retirement will look like.

Sandra McKinnon is a Human Sciences Specialist in family wellbeing with Iowa State University Extension and Outreach, serving 12 counties in the southwest part of Iowa.

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Aging Safely – Self or Others

While we’re all aging, some of us are further along in the process than others! But even you’re still very young, you probably have people you care about who might be labeled an “older adult.” With age comes certain privileges and freedoms, but we also have to acknowledge that aging also brings cognitive changes as well as physical changes. This is true even for those with no cognitive impairment or dementia – everyone’s brain changes as they age.

This cognitive aging can lead to “diminished financial capacity” – a term used to describe a decline in a person’s ability to manage money and financial assets to serve his or her best interests, including the inability to understand the consequences of investment decisions. Some errors that occur due to diminished financial capacity may be minor, like forgetting to pay a bill, but serious errors that threaten our financial security are possible.

Happily, there are steps we can take to protect ourselves and those we care about. These steps include:

  • keeping important documents organized and easy to find;
  • providing names of “trusted contacts” to your financial professionals;
  • creating (or updating) a power of attorney;
  • and more.

The Consumer Financial Protection Bureau (CFPB) provides a practical breakdown of steps that will protect you as you age, and also steps to help you assist an older friend or relative you are concerned about: Planning for diminished capacity and illness. None of us likes to think about possible future problems, but if something happens, we know we’ll be glad we did!

NOTE: People of all ages can be injured in accidents or suffer illness that diminishes ability to manage finances and make decisions. The steps outlined by the CFPB are appropriate for adults of all ages to consider.

For more details about cognitive aging and how it affects different types of mental functioning differently, see a trio of articles from The Center for Retirement Research at Boston College, starting with Cognitive Aging: A Primer.

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Improve Retirement Readiness by Being Realistic About Social Security

We already know that the average American is financially under-prepared for retirement, putting them at risk for lifestyle cutbacks and even hardships in retirement. A recent study (University of Michigan Retirement and Disability Research Center) showed:

  • that having unrealistically high expectations for Social Security benefits contributes to inadequate retirement savings; and
  • that the majority of workers over-estimate what they will receive in Social Security retirement income.

Those two findings combine to suggest trouble ahead. And it doesn’t take TOO much thought to reach the conclusion that everyone needs realistic expectations about Social Security income in retirement. The good news? It’s pretty easy to obtain a reasonable estimate of your Social Security income!

The Social Security Administration offers two excellent tools we can use to obtain a good estimate of what our Social Security retirement benefit will be. Both involve entering personal data, so be sure to use a secure internet connection. The Retirement Estimator provides a personalized estimate of your benefit at three ages: 62; your full retirement age (which is between age 66 and 67); and age 70. By logging into your “My Social Security” account on-line, you can see even more: you can pick a precise age at which you wish to claim social security, rather than being limited to just three options, AND you can review the earnings record shown there to make sure that all your earnings are included. Note: about a month ago I talked with a woman whose record was missing her earnings for 2018 and 2019! It’s a good thing she checked! Without those figures, her Social Security income would have been lower than what she was supposed to receive.

Suppose you discover that your Social Security income is projected to be about $2,000/month (in today’s dollars). Then you can consider: do you want to live on $2,000/month after you retire? If you’d rather have more income to live on in retirement, that’s motivation to save and invest now! To get started, learn about retirement saving options available through your employer: if a 401(k) or other tax-advantaged plan is available to you, that can be a great option. If your employer will match your contributions to a retirement account, then be sure to take advantage of that match, as well.

For those who do not have a retirement savings option available through their job, be sure to check out your Individual Retirement Account (IRA) options. The IRS Publication 590A explains the rules associated with contributing to an IRA account. You may choose to consult with a financial adviser in deciding how to invest those funds – an IRA can be invested in any type of financial account, including mutual funds, a stock and/or bond portfolio, and money market accounts. Your choice of investments, along with your decisions about how much to save, will have a huge impact on your retirement well-being. The Financial Industry Regulatory Authority (FINRA) offers great learning materials for learning to invest and for choosing financial professionals.

Sources: Squared Away Blog: Workers Overestimate their Social Security, 6-17-21, from the Center for Retirement Research at Boston College; and
Prados, María J., and Arie Kapteyn. 2019. Subjective Expectations, Social Security Benefits, and the Optimal Path to Retirement, University of Michigan Retirement and Disability Research Center.

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Every Little Bit Counts

I raise bees, then extract and sell their honey. I set my finances up so I can keep that money separate and use it to buy or replace equipment, hoping my hobby would support itself. If I run my apiary as a business, I would need an EIN (Employer Identification Number), and would need to keep good records of all my Income and Expenses. If I run my apiary as a hobby, I will still need to keep good records because I will need to report my income. Personally, I would keep track of my expenses even though they will not help me when filing my tax return. As much as I love bees and their honey, I want to track my expenses to make sure I am not losing too much money with this hobby.

An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. As a business, you will use a Schedule C to report your business activities (income and expenses) and determine what tax should be paid.  You will also be expected to pay self-employment tax quarterly.

As for me and my hobby, I will report my honey sales on a Schedule 1, line 8 of the Form 1040. The income won’t be subject to self-employment tax. On the downside, I may not be able to deduct expenses associated with my apiary.

So, you might be wondering now, “why report the income if I will have to pay taxes on it?” The first reason is that the law requires it. But in addition, there are at least two ways you can benefit from reporting the income.

  • If you have a lower income and are trying to make ends meet by working on the side, any earned income will be used to calculate the Earned Income Credit. Hobby income is not considered “earned income,” but if you report it on Schedule C as business income, then it is considered “earned income.” The earned income credit (EIC) is a tax credit that helps certain U.S. taxpayers with low earned incomes reduce the amount of tax owed on a dollar-for-dollar basis and may result in a refund to the taxpayer if the amount of the credit is greater than the amount of tax owed.  
  • Another benefit of reporting that income as earned income relates to Social Security. Remember that the monthly social security check you will receive in the future is based on current and past work and earnings history. Social Security retirement benefits are based on your average indexed monthly earnings (AIME) over your 35 highest-earning years.  You must have 40 quarters of at least $1410 (2020 rule) of earned income to qualify for Social Security.  Though the income from any job-on-the side is not enough to live on, it may be worth counting toward your 40 quarters and the calculations used to determine your future social security check.

Brenda Schmitt

A Iowa State University Extension and Outreach Family Finance Field Specialist helping North Central Iowans make the most of their money.

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