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.
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)?
- 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.
- 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).
- 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!).
The current period of job loss and reduced income has affected people in different ways. The result? Different households face different financial challenges at this point. Whatever your situation, now is s a good time to assess your financial situation, evaluate your priorities, and take steps to improve your situation as necessary. If you’d like some help, your local ISU Extension financial educator is available to work with you, providing free, non-commercial information and a sounding board as you make your plans.
- Some of you have been living with seriously reduced income – and still are. Your task has been to find every possible way to reduce your expenses and/or find new income and make use of new resources, including public assistance if you qualify. You must communicate with all of your creditors, but avoid making promises you cannot keep. If returning to something like normal looks unlikely, you may need to consider major lifestyle changes.
- Some of you lost income for a while, but are now back to an income you can live on. It is likely that you got behind on bills, built up credit card debt, and/or depleted your savings during your crisis. Strong focus on repaying those debts and building up emergency savings will get you ready in case of an unexpected expense or another loss of income. Careful examination of your spending choices will help you regain equilibrium and then build a strong cushion.
- Others of you had stable income, but have realized that if you did lose income, you would be in a very difficult spot. Facing the reality that you lack basic financial security can motivate you to build up savings and pay down debt. Start by cutting your living expenses so that your regular monthly expenses are 10-25% less than your income. Putting the extra funds toward savings and expedited debt payment will build you a cushion that will bring peace of mind and make your life easier if/when hardship strikes.
- Still others have stable income, and have felt secure that even if you did have a cutback, you would be okay. In your case there is no obvious need for change, but it’s wise to maintain control of your finances through good planning. You may wish to build an even stronger savings cushion, after seeing others struggle with lost income for six months or longer. As you build savings, seek out accounts that pay slightly higher interest while still providing ready access to your funds.
I was recently asked by my supervisor for performance goals (key actions I plan to work on); these are due by the end of the year. We do this so we keep moving forward, rather than standing still or sliding backwards in our skills and our work.
As we turn the New Year calendar, it may also be time for us all to consider setting goals for our personal lives. As the ball drops in Time Square in New York City soon, many of us make resolutions or set some goals for our lives in the next year.
As I consider my personal goals for the coming year I approach it from several directions:
- Things I want to do – “bucket list” items. I am sure travel will continue to be on my list.
- Major projects that need to be done around my home: some updating of the electrical system needs to be on my list.
- Smaller projects – I want to cull through my closet and pull out clothes I haven’t worn for a while; I can give these items to Goodwill for others to use.
Last year, I replaced a car. I visited the Grand Canyon and saw parts of Arizona I had not seen before – Sedona, Flagstaff, Jerome and Williams (where I felt like I was in the Cars movie!). It feels good to look back and see what I accomplished in the past year. I now want to set some clear goals for the coming year, so I can keep moving forward.
What’s on your goal list for 2016?
Need help curbing your spending? We all engage in ineffective or wasteful buying at times, which can prevent us from reaching our goals.
When your will power lets you down, review these questions. Be sure to answer honestly!
Will this purchase meet one of my goals?
Do I really want or need it?
Can I afford it?
What must I give up to have it?
Am I buying this only because it’s on sale?
Would I buy this if I had to pay cash?
Am I buying because I’m depressed?
Would I come back tomorrow to buy this?
How much do I owe on my credit card this month?
If I charge this, can I pay off this month’s bill?
Could I feel better now without spending money?
Put these questions in your wallet and pull them out before getting in the checkout line or clicking the website’s checkout button!
As a young adult, have you ever wondered how to make ends meet? Have you imagined how you would like to live in the future? Do you think about your future transportation choices, and where you would like to live? What kind of entertainment you will enjoy? Remember, it’s your life, you can do what you want. OR CAN YOU?
The Jump$tart Coalition for Personal Financial Literacy® is a coalition—an organization of organizations which share an interest in advancing financial literacy among students in pre-kindergarten through college. Within their website, is a program called Reality Check! http://www.jumpstart.org/reality-check.html
This program allows you to imagine the possibilities based on how you want to live. You will be surprised at how much your “dream life” will cost. Once you have completed the choices, the program tells you what income you’ll need to live the life you want. A list of careers will be shared to support your lifestyle.
Your reality check may lead you to stay in school, or strive for a better job, or change your beliefs about some of the things you “need” to live. Check it out today!
As you plan your spending, you must decide what’s most important to you. That includes defining and writing down your goals. Goals are specific outcomes you strive and work for. They are different than dreams or “New Year’s Resolutions.”
Your goals are based on your underlying values. For example, if education is something you value, then your goal may be to have your children attend college. This goal may then guide your financial decision-making, leading you to begin a savings plan to provide funds when the children reach college age.
Goals can change as your interests, income, life-style, and personal circumstances change. For example, if you get laid off from your job, you will probably set aside some less-important previous goals, at least temporarily.
The first step is to identify your goals – or what you want to get done. Some goals are short term – this week, this month, or this year. Examples of short term goals might be: buying enough groceries for the week; buying shoes for your children; or getting a new coat. Some are for later – one to 3 years – such as paying off your credit card debt. Other goals are for the future – perhaps 5 years and beyond – and might include saving for a college education for your children or buying a house. Any goal that takes five years or longer is known as a long-term goal.
To be successful, goals should be SMART:
- Specific – This is what you plan to do.
- Measurable – You should be able to tell if you are achieving your goal.
- Agreed Upon – “This is something everyone in our household agrees should be done”.
- Realistic – Goals fail if they are not realistic or achievable.
- Timed – Goals should have beginning and ending dates.
Try your hand at writing a SMART Goal.