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The idea of retiring in your 50’s as opposed to your 60’s appeals to many Americans, and for good reason. Why postpone the good life, right? However, if you are serious about retiring early, you need to plan in advance and make sacrifices many years ahead of time.

Here are 8 areas to consider if your serious about retiring in your 50’s:

1. Free Time

Many folks welcome any free time they can get, yet don’t consider how to manage it once they retire. It’s important not to dismiss the notion of being bored in retirement. Think about your social circle (spouse, friends, colleagues, etc.) who may still be in the workforce. Your schedules could potentially look very different once you retire, leaving you with a lot of free time you may not be used to.

Before retiring, think about things you’d like to do on your own – volunteer in the community, hike local trails, try a new workout class, etc. Ideally these new activities won’t cost you a lot of money, and might even give you the chance to earn some “fun money”. Consider the costs involved with how you spend your new free time, but most importantly, make sure these new activities give you purpose when you wake up in the morning. This is your chance to get creative, so have fun with it!

2. Debt

Becoming debt free should be a priority at any stage in life, especially if you want to retire in your 50’s. If you’re aiming to retire early, rid yourself of any consumer debt like credit cards and auto loans. Of course, paying off your mortgage is a major plus, but it may not be realistic for everyone. Regardless if you own or rent, prioritize keeping your housing related expenses manageable that way you increase your cash flow. By eliminating debt service payments (expense), you will fund your retirement accounts (income). If you’re serious about retiring in your 50’s, get aggressive about eliminating consumer debt.

3. Expenses

Retirement expenses are directly tied to your debt and how you spend your time. As you begin to plan for retirement, it’s important to be transparent when it comes to your expenses. All too often people don’t take an honest account of how much discretionary spending they do – eating out, entertainment, travel, etc. – and it throws off their projected retirement expenses.

You can safely expect to spend an extra 10% – 15% over your planned budget for the first couple years of retirement. This gets you ahead of the game and provides a buffer if you need it. The last thing you want to do is retire, only to come to the realization that you’ve significantly miscalculated your discretionary budget. It’s better to be upfront and honest about your spending habits before retirement than have to adjust later once you’re retired.

4. Cash Reserves

The need for adequate cash reserves is never more important then it is in retirement. Life is always throwing curve balls our way and that does not change in retirement. In my experience, the better you prepare, the less likely emergencies strike. Beef up your cash position and plan for any large purchases. A general rule of thumb is 3 to 6 months of expenses, but in retirement I would certainly lean toward 6 months.

If you have trouble saving up your emergency fund, consider setting up an allotment from your paycheck to a bank separate from where you have your primary checking account. Out of sight out of mind. Last minute weekend getaway or new patio furniture: not an emergency.  Roof fails or air conditioning unit dies in July: emergency.

5. Retirement Savings

Most Americans have a large portion of their money in retirement accounts – 401(k)s, IRAs, 403(b)s, TSPs, 457, etc. These accounts are ideal for retirement savings due to tax benefits. However, keep in mind most employer-sponsored retirement plans have early withdrawal penalties prior to age 55. IRAs and Roth IRAs have penalties for withdrawals prior to age 59.5.

As you approach retirement, do your research on different retirement account options. There’s a 72(t) early withdrawal provision that allows substantially equal periodic payments from a retirement account as long as the distributions last until age 59.5 or 5 years, whichever is longer. You can also fund a non-retirement brokerage account early and often. These types of accounts allow you to investment in the same way you can in retirement accounts without early withdrawal penalties. Explore the pros and cons of each, it’s best to know all your options.

6. Social Security

The earliest you can start collecting Social Security is age 62, so there’s really no need to factor it in. However, if you are planning on earning income in retirement, you’ll want to be aware of the social security earnings test. In 2018, Social Security will withhold $1 in benefits for every $2 of earnings in excess of $17,040. This applies in years before the year of attaining NRA (Normal Retirement Age).

If you are in your 30’s or early 40’s, you may not want to factor Social Security income into your retirement plan at all. Not because you won’t receive Social Security (although a lot can change in 15-25 years), but it’s always better to be over-prepared than under-prepared.

7. Withdrawal Rates

If you’re planning to take income from your investment portfolio when you retire, you’ll want to be sure you’re taking it at a sustainable withdrawal rate. The money will need to last you 30, possibly 40+ years. If you are starting income distributions from your investment portfolio in your 50’s, you’ll want to avoid anything higher than a 3% – 4% withdrawal. Play around with the numbers to make sure your withdrawal rate is sustainable for retiring in your 50’s. The last thing you want to do is outlive your money.

8. Health Insurance

Medicare starts at age 65, so if your employer does not offer you the ability to continue health benefits into retirement, you’ll need to factor in the cost of increased health care costs between retirement and age 65. Do your research and plan on the costs increasing between now and retirement. If you have a spouse and they have coverage through their employer, consider switching to their policy.

Be sure to periodically reassess your goals. You may have set a goal years ago that has lost its luster today. If you always had the goal of retiring in your 50’s, for example, but find fulfillment in your work, don’t hold yourself to a goal you made years ago. I’ve seen folks retire because they’ve romanticized the idea of retirement for so long, only to end up regretting the decision. It’s okay if your goals change, just make sure they align with the season of life you’re in.

Retiring in your 50’s is absolutely doable, but requires planning and smart changes to your personal finances now. As a part of the workforce, you’re trading your time for money. However, once you retire, this is no longer necessary to meet your lifestyle. That doesn’t mean you shouldn’t work or do income-producing activities. In fact, if you can have fun, meet new people, or follow a passion while generating income, that’s an added bonus. However, if after running the numbers you know you’ll have to work in retirement, take a step back and reevaluate your situation. It might be a good idea to get an unbiased opinion from a financial planner to look at your situation.

If you’d like to discuss your options with us, book a call using this link and we’ll be in contact with you shortly.

It’s no secret that college expenses add up quickly.  Nowadays, paying for college takes time and careful consideration of a family’s finances.  Good news is there are plenty of saving plans available to help pay for college – the most popular one being the 529 Plan.  The biggest appeal of the 529 Plan is it offers tax free growth when used to fund qualified higher education and high annual contribution limits.  However, there are a few scenarios (one in particular) where a Traditional or Roth IRA may be a viable option to consider.

The most common scenario occurs when there hasn’t been any money set aside for your child approaching college – not in the budget, simply overlooked, unsure of a college savings account benefits, or any number of other reasons – but you have an IRA or Roth IRA account and you feel it’s important to help your child pay for their college education.

In this case, there is an exception that allows IRA distributions for qualified higher education expenses like tuition, books, supplies, fees and room and board, etc. as long as the student is enrolled in a degree program.  This exception allows you to avoid the 10% early withdrawal penalty on IRA distributions if you are under the age of 59.5.  If you are older than 59.5, this exception does not apply to you as there no penalties to withdraw from your IRAs at that age.

Balances in IRAs and Roth IRAs are not used for financial aid need analysis purposes and should not affect financial aid eligibility.  However, withdrawals from IRAs are generally treated as income and may affect eligibility.  Even withdrawals from Roth IRAs are treated as untaxed income and may affect needs based financial aid eligibility the year following the withdrawal.

So basically you have a traditional IRA being used as a tax-deferred college savings vehicle. If you are able to limit your withdrawals from a Roth IRA to contributions only, the distribution is not only tax free, but penalty free as well when used for qualified higher education expenses.

I want to emphasize that prior to considering this option, it is absolutely imperative you thoroughly review your finances to make sure this will not put your financial future and retirement plans at risk.  I’m not an advocate of borrowing or withdrawing from retirement accounts for any reason outside of providing for life in retirement, and I strongly advise against placing your financial future in jeopardy to fund your child’s college education.  I have seen this happen far too often with very poor outcomes – becoming a financial burden to the kids later on, pushing back retirement or worse, not being able to retire at all.  I have also seen folks withdraw significant portions of their IRAs to fund their kid’s college, only to see them drop out.

To be clear, I am not suggesting student loans. However, the fact is students can borrow money for college and there are no retirement loans available, as far as I know. If your child needs to take out a loan, by all means consider helping them pay off their student loans once completing their education.  Whatever you decide to do, make sure you prioritize evaluating the long term effects this will have not only on your finances, but theirs as well.

Other important considerations include:

  • Distribution and expenses must happen in the same years
  • Qualified educational expenses can only be used towards one educational tax benefit (no double dipping!)  Ex: you can’t take a penalty-free IRA withdrawal and use the same expense toward a Lifetime learning tax credit.
  • You can’t replenish the funds you withdrew from your IRA account except by normal annual contributions, which are subject to annual limits

If you’d like to discuss your options, book a call using this link and we’ll be in contact with you shortly.