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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Get More for Your Driving Dollar

Guest blogger Phyllis Zalenski, ISU Extension

With gas prices at record highs, many of us are feeling financial pain at the pump and on our household budget. Although we cannot control soaring gas prices, there are ways to improve gas mileage. The U.S. Department of Energy offers the following driving and car maintenance tips to save you money.

Driving Tips:

  • Drive sensibly and avoid aggressive driving, such as speeding, rapid acceleration, and hard braking. Aggressive driving can lower your highway gas mileage by 15% to 30% and your city mileage by 10% to 40%.
  • Avoid driving at high speeds. Above 50 mph, gas mileage drops rapidly. For every 5 mph above 50 mph, it’s like paying an additional $0.25 or more per gallon of gasoline.
  • Combine errands. Several short trips, each one taken from a cold start, can use twice as much fuel as one trip covering the same distance when the engine is warm.
  • Use cruise control on the highway to maintain a constant speed and, in most cases, save gas.

Car Maintenance Tips:

  • Use the grade of motor oil your car’s manufacturer recommends. Using a different grade of motor oil can lower your gas mileage by 1%-2%.
  • Inflate your tires to the pressure listed in your owner’s manual or on a sticker that is either in the glove box or driver’s side door jamb. This number may differ from the maximum pressure listed on your tire’s sidewall.
  • Get regular maintenance checks to avoid fuel economy problems due to worn spark plugs, dragging brakes, sagging belts, low transmission fluid, or transmission problems. Fixing a serious maintenance problem, such as a faulty oxygen sensor, can improve mileage by as much as 40%.
  • Don’t ignore the check-engine light—it can alert you to problems that affect fuel economy as well as more serious problems, even when your vehicle seems to be running fine.

Learn more fuel saving tips and other ways to save money on www.fueleconomy.gov

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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Avoid Excessive Tax Bills

In my work as a VITA volunteer, AND in my personal life, I’ve run across a larger-than-usual number of people this year whose tax returns left them with a need to pay extra to the IRS for 2021.

  • When it’s a small amount, it’s no big deal — in fact, some folks see that as the ideal situation. They’d prefer to owe Uncle Sam a little at the end of the year, rather than getting a big refund, which essentially means they have given a no-interest loan to Uncle Sam during the year.
  • But when people owe a large amount of income tax when they file, that means something has gone wrong with the system: not enough taxes have been withheld from their income throughout the year.

To AVOID owing substantial income tax at the time you file, your best step is to check the IRS Withholding Estimator. This easy-to-use tool allows you to make sure you are having an appropriate of federal income tax taken out of each paycheck. The tool asks you to enter information about your filing status and number of dependents, and then asks you to enter information from your most recent pay stubs — both year-to-date information AND information for the current pay period. Based on this information, the tool will help you see if you are having the appropriate amount of tax withheld from your paychecks.

Why does this happen and when do I especially need the withholding estimator? Checking on your tax withholding is especially helpful in certain situations:

  • When you have income from several different sources: if you have several different part-time jobs, or a mix of retirement income and employment income, OR if you have a spouse who also has income. In these situations, none of your income sources knows how much your total income for the year is likely to be. The problem with that is that they might withhold only a small amount of tax, on the assumption that this part-time job is your only income for the year. However, when you add up all those different sources, you may be in a higher tax bracket than any one of those sources would have guessed. The withholding estimator can help make up for the fact that no one income provider knows your whole income picture.
  • When your family situation changes: you get married, or are divorced or widowed, or you add new members to your tax household. In these cases, the withholdings you have had for years may now be inappropriate for your new situation. Some of the people I’ve seen this year who have gotten unexpectedly bad news with their tax return have been new widows. This was their first year filing single, and they owed more taxes than expected, due to the smaller standard deduction that applies to single people.

The IRS withholding estimator covers only federal income tax. When it comes to state income tax, Iowa has a Withholding Calculator that may be helpful. My impression is that it may not be quite as helpful, but it is worth checking out. Another option is to talk with your tax preparer or to attempt a tax calculation for 2022 using 2021 tax forms or software, since tax rates typically do not change dramatically from one year to the next.

Penalties. It is important to be aware that the United States tax code requires that taxes be paid throughout the year, not just at the end of the year. If you end up owing TOO much at the end of the year, you may be charged a penalty for not paying enough into the system throughout the year. Most people can avoid that penalty by paying in throughout the year an amount at least as much as their tax bill for the prior year. People with incomes over $150,000/year can avoid the penalty by paying in at least 110% of what their tax bill was for the prior year.

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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Crypto Scam Beware!

I have heard some unbelievably sad stories this tax season and it is only the 3rd week we have been preparing and filing returns.

An older Iowan came to our Free Tax Prep site this week and showed me 2 police reports she had filed earlier this month. She received a call on a Sunday from someone informing her that the IRS was on their way to her home to arrest her because she owed $3000.  She was told that if she paid them immediately, the problem could be resolved.  Of course, the bank was not open but, she could pay them with Bitcoin and there happened to be a Bitcoin ATM just down the street from her home.  She was warned that she had to stay on the phone with them the entire time this transaction was being handled.  One ATM would not dispense the full amount, so the scammer stayed on the phone with her the whole time she drove to the next closest Bitcoin ATM which was in Minnesota. 

Her children got involved when she called them because she now had no money to pay rent or buy food or medications.  The two police reports did nothing to help her recover her losses so, her children helped her enroll in the SNAP program (Supplemental Nutrition Assistance Program) to ensure she had food and a friend lent her $300. 

BEWARE: For victims of a crypto scam, recovering funds is extremely unlikely.  Crypto scams are common. The Federal Trade Commission (FTC) received nearly 6,800 complaints of cryptocurrency investment scams from October 2020 through March 2021, up from 570 in the same period a year before. Reported losses grew more than tenfold to above $80 million.

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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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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Emergency Savings: How Much Do I Need?

Prior to the Covid-19 pandemic, approximately 30-50% of adults in the United States (depending on the study) would struggle when faced with an unexpected or emergency expense. While the percentage of affected adults improved with the arrival of COVID relief programs, recent data shows that the numbers may be trending back down toward pre-pandemic levels. The aggregate data will continue to show these fluctuations over time depending on the macroeconomy, significant policy changes, etc., so a more immediate question for consumers is:  How much do I need in my emergency savings account? $400…$1,000…3-6 months of expenses? The answer is not concrete and completely depends on your own personal situation, but here are some things to consider:

  1. How large is your household? – the necessary living expenses for a single individual will likely look much different than a household of four.
  2. Do you own a home or rent? – homeowners face the risk of repair costs, which increases their need for emergency savings. The recent derechos are a perfect example.
  3. What are your insurance deductibles? – this is an often-overlooked aspect of emergency savings. Auto insurance deductibles tend to be around $250 or $500, while health insurance and homeowner’s insurance deductibles could be in the thousands. A higher deductible provides lower premium costs, but does increase your need for emergency savings.
  4. How stable is your income? – are you self-employed or an independent contractor? Do you work in a high-turnover industry or face occasional government shutdowns? How likely you are to need those savings to make up for lost income should also factor into the amount saved.

This is not meant to be an exhaustive list, but rather a starting point for your emergency savings plan. For the DIY-ers, I encourage you to utilize PowerPay, Utah State University Extension’s free, online, personal finance tool to create your emergency savings plan; otherwise, you can contact your local Iowa State University Extension and Outreach Financial Educator for a free, confidential, 1:1 Financial Consultation!

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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Your Rights: “Surprise” Medical Bills

I have been hearing over the past several months about a new law that reduces the likelihood that we consumers would get medical bills saying we owed more than our normal co-payment or deductible because a health provider was not part of our insurance plan’s network. The law is called the “No Surprises Act.” It went into effect January 1, but I haven’t had a chance to study it like I would wish.

This morning’s issue of Kaiser Health News (which is a highly-reputable source of information on health policy and the health industry) linked to a podcast where the No Surprises Act was discussed. It’s an 18-minute listen — I scanned the transcript, and pulled out a few key points. Please note that I am not including everything — just some highlights. I’d encourage you to check it out yourself to get the full story.

The No Surprises Act is good news — it is designed to protect us from the extra costs we might incur when an out-of-network provider gets involved in our care, even though our initial contact for care was with an in-network provider. Examples? It could be that our doctor sends our blood samples to an out-of-network lab for testing, or the anesthesiologist our hospital brings in to assist is an out-of-network provider — situations like that.

Of course, nothing is perfect, including this law. There are still things we need to know in order to protect ourselves.

  1. The No Surprises Bill applies mostly* to hospital care. If you are getting care at a clinic or doctor’s office, you are likely not protected from surprise out-of-network bills. That means you still need to ASK.
    *Why did I say mostly? Because there are some urgent care clinics that might be covered, but it is hard to find out. So it’s safer to assume a clinic is not covered.
  2. The law does NOT cover ground ambulance trips, so we may still get big bills for those. (Happily, it does cover air ambulance rides).
  3. When asking if a provider is in network, the correct question is: “Are you in-network for my insurance plan?” And be sure they know the detailed name of your plan.
    Note: the WRONG question to ask is “do you take my insurance?” They might accept your insurance, but still be out of network.
  4. Be cautious if a hospital asks you to sign a “Surprise Billing Protection Form.” The name makes it sound helpful, but you need to read the details. This form is used if the hospital is bringing in a provider who is not in your network. By giving you the form, they are disclosing the out-of-network provider, giving you an estimate of the extra cost you’ll incur, AND telling you the names of in-network providers you could use instead. If you sign the form, you are agreeing to pay the extra charge for an out-of-network provider.

This is a starting point for understanding your rights under the new law. Since it is new, everyone (including providers and insurance companies) will need to be learning new processes and rules. The law creates a hotline for reporting or appealing violations: 800-985-3059. The staff on this line will also be learning, but it’s still wise to report and appeal. Just recognize it may not be a fast or easy process to resolve disputes.

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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Earned Income Credit Expansion

I took a phone call this morning from an older gentleman (over 65) who had come to have his taxes done at our VITA site last year and had been told he didn’t need to file, and probably would never need to file again. He called just to double-check that he really didn’t need to file. His situation hadn’t changed from last year, but when he told me what kind of income he has, I said, “Hey, let me check something out, and I’ll call you back.”

Here are the changes that affect this gentleman:

  • In the past, people without children were only eligible for the Earned Income Credit if they were between the ages of 25 and 65. For 2021 tax returns, the older age limit is gone completely, and the younger age limit is changed. People age 19 and over who are not enrolled in school half time can receive the EIC. Note: young adults who are former foster children OR homeless may be eligible starting at age 18.
  • The AMOUNT of the EIC for people without children is also increased dramatically for 2021 tax returns.

Spread this news!! If you know any older adults or young adults without children, make sure to tell them that if they have income earned from work, they should definitely file a tax return this year, even if they are not required to file.
I quickly prepared a fake return for the man who called me, assuming his income was about the same as last year. It came out that he would be eligible for EIC of over $1,000! I’m so GLAD he called to check – if he had not called, he would have missed out!

These changes are, at this point, temporary. We’ll need to stay tuned to see if any of them are continued. The moral of the story? It never hurts to ask!

P.S. Other changes are permanent:

  • People with investment income up to $10,000 will be eligible for the EIC – that’s an increase in the limit amount.
  • In addition, there are now some situations where a person who is “Married Filing Separately” might be eligible for the EIC – they need to be legally separated from their spouse and not living together at the end of the year OR they need to have lived apart from their spouse for the last 6 months of the year. This change only applies to people with children.

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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