The way we work and save for retirement has changed and the old rules no longer apply to every individual’s situation. There are many professionals with the resources to retire early, but continue working until retirement age just to avoid paying penalties to the IRS. However, there are ways to retire early that you might want to consider.

You Can Pay the Penalty

The most obvious solution is to bite the bullet and pay the 10% penalty for early withdrawal. Most people are motivated to avoid paying the early withdrawal penalty and will wait until the legal retirement age of 59 ½, before accessing funds in their retirement accounts. This can be an attractive option, simply because the tax-deferred investments in your 401k may have outperformed other taxable investments. If this is the case, your tax benefits may actually pay for the penalty by the time you’re ready to retire. Of course, this all depends on how well your tax-deferred investments have performed.
The Substantially Equal Periodic Payments Option
The IRS allows early retirees to access their retirement funds without paying the penalty through their Substantially Equal Periodic Payments (SEPP) program. An early retiree will have to consent to making substantial annual withdrawals each year until they reach traditional retirement age, as outlined by a calculation chart published by the IRS. However, failing to withdraw the correct amount each year can cause the IRS to charge you with the 10% penalty for each withdrawal you have already made. For this reason, it’s best to work with a tax professional to ensure you meet all of the requirements set out through the SEPP program.

Additionally, the program requires that you fulfill a minimum of five withdrawals, before your obligation is complete. If you retire at 40, you must adhere to the withdrawal requirements until you turn 59 ½ years old. However, if you retire at 57, you must continue the SEPP withdrawals until you reach 62 years of age. As long as you can adhere to the timetable, this may be a good option for accessing your retirement funds early and without paying the penalty.

Convert to a Roth IRA

Another option that will help you avoid the 10% penalty is to convert your 401k to a Roth IRA. Once you open the account, you will have to wait five years, before you can begin withdrawing your contributions. For that reason, it will be important to anticipate your early retirement and plan ahead. However, once you have met that requirement, you can begin withdrawing without facing a penalty.

An additional restriction is that the IRS requires that withdrawals be made in a particular order. You must withdraw direct contributions first, before withdrawing funds that were converted into the account. Lastly, you can withdraw earnings on those contributions. Depending on your situation, this may be a worthwhile alternative.

While these options do exist, waiting for retirement age may still be worthwhile. Where a 401k account is concerned, remaining on the job will keep those employer contributions coming. That “free money” will pad your retirement account, while your savings continue to earn on investments. Additionally, you’ll continue to benefit from tax breaks for a few more years. Ultimately, it will be your decision, which you can only base on your specific circumstances. If you do choose to retire early, you should consult a Financial Advisor and/or tax professional, before you act.

In retirement it’s not always about the money you have, it’s about how much you are spending.  As you prepare or revise your retirement plan, one of the most important steps that you can take is to ensure that your projected future budget is accurate. Any oversights or poor estimations can unfortunately lead to financial shortage in retirement. However, the flip side of this is that overestimating expenses may lead to unnecessary financial anxiety. It could cause you to scale back your lifestyle so dramatically now that you cannot maintain a comfortable lifestyle. In some cases, it could cause you to work for several additional years than you actually need to.

When you read retirement planning books and articles, you will commonly see advice that tells you estimate future financial needs at 80 percent of your current monthly expenses. However, the Bureau of Labor Statistics indicates that actual retirees spend approximately 25 percent less than they did in their working years. This five percent difference may not sound like much, but it can result in a significant reduction in the amount of money that you need to save for retirement. These are some of the major expenses that may decrease after you retire.

Transportation Expense

Your current transportation expense may include two car loan payments, auto insurance on two vehicles and gas. The Bureau of Labor Statistics indicates that fuel expense may decrease by more than 30 percent annually after you retire. In addition, many married couples are able to downsize from a two-car household to a one-car household. This eliminates a substantial amount of money on car loan payments and auto insurance premiums.

Food

Working adults may go out to eat more frequently than retired adults. For example, it may be convenient to drop by a fast food restaurant on your lunch break at work or to pick up a pre-made meal on your way home in the evening. When you are retired, you may have more time to make thoughtful grocery store purchases and to prepare affordable meals at home. In fact, you may expect to spend up to 25 percent less on food after you retire.

Housing

The primary housing expenses for older adults are a mortgage payment, property taxes and home insurance. The Bureau of Labor Statistics states that almost 62 percent of retirees have paid off their mortgage, and this number increases as seniors continue to get older. While property taxes and home insurance premiums remain, the elimination of a mortgage payment can result in significant savings in your budget.

Insurance

Insurance costs fluctuate in retirement. After all, as you get older, you may pay more on medications and related expenses regardless of the insurance plan that you have. However, you may qualify for auto and home insurance discounts. You also may no longer have the financial need to maintain life insurance, and you may be able to eliminate this premium from your budget.

Entertainment

As you prepare for retirement, you may believe that your entertainment expense would increase dramatically because you seemingly will have more time to spend golfing or watching movies at the theater. However, as you get older, your energy level for participating in these types of activities can decline, and you may feel more content to simply spend time at home or in the company of family and good friends. You may expect to spend a decreasing amount of money on entertainment as you continue to advance in age.

As you can see, you could actually spend considerably less in retirement in many areas than you currently do. This information can help you to create a more realistic budget based on your projected lifestyle. Remember to review your retirement budget periodically going forward so that it remains as realistic as possible.  Yes, we are here to help create your budget and plan with you.

Achieving a high income and net worth is half the battle in the quest for financial security. The other half is trying to keep and grow your assets once you have them. While this latter half is perhaps a nice problem to have, it has been the cause of many a headache.

One problem some people make is the proverbial “putting all of their eggs in one basket.”  In the investing world, even just putting too many eggs in too few baskets can be enough to sink a financial battleship. Too often, people make this mistake in a misguided effort to go all in on chasing maximum returns.

Conventional wisdom does indeed hold that you have to accept higher risk in order to get higher returns and, accordingly, have to accept lower returns in order to lower your risk. However, there are a couple of quite serious problems with this logic, common though it may be. For starters, it is almost impossible to predict with certainty which investments will flourish in the future and which ones will tank.

It is not as though anyone ever sets out to have their financial goals torpedoed by a bad investment, but, no matter how sound a plan may seem at the outset, there is always at least some chance that it could go awry. If a particular investment makes up even as little as 20 percent of your portfolio and crashes, it can take your financial goals and security down with it. Fortunately enough, this reality does not have to doom investors to rolling the Wall Street dice as best they can and then sweating out results over numerous sleepless nights.

The concept of financial diversification is actually old enough to have been referenced in a Shakespeare play, “The Merchant of Venice,” four centuries ago. In the 1950s, Harry Markowitz, an academic researcher, articulated modern portfolio theory. His research uncovered the insight that putting together a portfolio of investments that did not all correlate with each other had the effect of reducing the variability (risk) of the portfolio without giving up returns.

In other words, as long as all of your investments do not tend to rise and fall in value at the same time, your portfolio could be effectively insulated from catastrophic losses while still set up for strong long-term gains. Accordingly, diversifying your investments across numerous (thousands) of companies prevents you from having to worry about whether one or even several of them will collapse. Even though it could happen, it could be on a small enough scale that it will not hurt you.

Undoubtedly, these realizations explain much about why it is so difficult for even professional investors to beat the returns of broad indexes like the S&P 500.  Diversification is sometimes described as the only free lunch in finance.  Accordingly, as simple as it sounds, the best approach, by far, that you can take once you have otherwise reached a high income or net worth is to put your investment money in broadly diversified funds and leave the anxiety to those prone to over-thinking things.

Allow us to take a look at your retirement plan and assess the amount of risk you currently have.  You should be confident your plan will make it through any potentially volatile years to come.

If you are like many other hardworking adults, you may find yourself periodically dreaming about what life will be like after you leave the workforce and enter retirement. Regardless of whether you plan to simply kick back and relax close to home or you have grand dreams of traveling frequently in retirement, you will need to have enough cash on hand to live on. Unfortunately, a report released by Financial Engines indicates that almost one in seven adults who are at least 55 years old have stated that they procrastinated on saving for retirement.

Why Adults Procrastinate on Saving for Retirement

You may think that the primary reason why individuals would not save money regularly for their golden years is because of a lack of funds, but this is not the case. In the same report, two out of five procrastinators said they got a late start because they had other priorities for their money. Half indicated that stress played a role in retirement planning and saving. Some of the other more common reasons for procrastination include the belief that it is too difficult, the thought that they may get taken advantage of or a lack of knowledge about retirement planning and saving.

The Impact of Procrastination on Your Retirement Plans

Many adults who procrastinate in this important area have the intention of playing catch-up later in life. However, this may be more challenging than it may seem at first glance. When you procrastinate, you give up your regular contributions. You also give up employer-matching contributions and compounded growth, and these two factors can have a huge impact on the size of your nest egg. Delaying your retirement planning and saving effort essentially means that you must come up with a tremendous amount of additional money to catch up to a balance that you would have had if you started saving regularly in your 20s.

The Urgency to Get Started Today

Regardless of the reasons or age, now is the time to make a bold change. By continuing to procrastinate, you simply dig an even larger hole that is more difficult for you to get out of. Saving may be as easy as foregoing that fancy vacation that you take every year or downsizing the scope of your vacation. It may mean not redecorating your home as frequently or scaling down your holiday gift-giving efforts. There are many ways that you may be able to simply cut back without detracting from your quality of life, and these steps can have a huge impact on your financial status in your retirement years. Of course, making regular monthly contributions is also advisable. Saving at least some money now is better than not saving any.

How to Get Started

There are various types of retirement accounts that you may have access to depending on your circumstances. A good starting point is to maximize an employer-sponsored retirement account if your employer offers matching contributions. These contributions could essentially double your total account contributions and help you to get back on track more quickly and easily. If this is not an option, carefully review the pros and cons of various retirement accounts. Once you decide which type of account you want to open, schedule automated transfers. By automating this aspect of your finances, your balance will grow without additional effort required.

Some people prefer to hire a financial advisor to assist with retirement planning and account management. If you are confused about or intimidated by any aspect of retirement planning, it is best to seek professional guidance rather than to take chances.  Remember, you see a doctor when you have concerns with your health, why not talk to a financial professional when you have concerns about your finances?   We are here to help.

A common problem faced by insurance and annuity holders relates to a need to upgrade to a better financial option without paying taxes on gains earned on the old policy. There are many legitimate reasons for wanting to upgrade. AAFMAA recommends a 1035 exchange to accomplish this objective. A 1035 exchange has a complicated set of rules established by the tax code that must be followed to qualify this exchange as a nontaxable event. Based on the complexity of the tax code and limitations placed on these exchanges, it is highly recommended that you seek the advice of a tax professional before moving forward to avoid possible tax complications.

Factors to Consider When Exchanging A Life Insurance Product

The main thing you must remember is that no cash can change hands for this exchange to legally qualify as a tax-free 1035 exchange. A life insurance policy can be traded for another life insurance product. The tax code also allows for the exchange of a life insurance product for an annuity. This type of transaction is referred to as a replacement. In all tax-free exchanges, the policyholder must remain the same.

It is prudent to exercise caution before moving forward with a 1035 exchange. Not all exchanges are tax-free. Remember that in the case of life insurance policies, if you surrender your policy early, you may incur surrender charges and taxes. Before any definite decisions are made, you need to research the marketplace to determine whether you are insurable. Your health status and age will significantly impact the cost and availability of a new life insurance policy.

What to Consider When Upgrading Your Annuity

When making a change from an old annuity to a new one in a 1035 exchange, you won’t have to pay taxes on your earnings. Immediate Annuities reminds clients that while your taxes can be deferred, it is important to realize that you still may have to pay surrender fees and penalties depending on the terms of your current contract.

After the exchange takes place, then you are free to change ownership. To qualify as a 1035 exchange, an old annuity can only be exchanged for a new one. An annuity product can’t be exchanged for a life insurance product to comply with the strict requirements.

General 1035 Exchange Guidelines

You can exchange multiple old contracts for a single new contract. The IRS code does not limit the number of old contracts that can be traded for a single new contract. This fact opens the door to many possibilities. As mentioned above, the rule about ownership consistency must be followed naming the same owner on all policies. For accounting and tax purposes the adjusted basis of the new contract will be calculated by totaling the adjusted basis amounts of all contracts exchanged.

Conclusion

There is a practical reason 1035 exchanges are so popular. Deferring taxes as long as possible is always a priority. There is no reason to feel trapped in your current life insurance or annuity contracts by tax ramifications. By using a 1035 exchange, you can take advantage of better alternatives while still deferring taxes.

Everyone should have a will; it ensures that your loved ones will receive the assets you wish them to have in the event of your death. To be clear, a will is a legal document that states how you want your property to be distributed and to care for any minor children. To ensure that your wishes are carried out as stated by you, a will must be written and signed by you and your witnesses.

Keep in mind; even though you have set up a will for your family; you may have several reasons to update your will, especially if your family situation has changed such as a birth in the family, an adoption, marriage or divorce. Another reason to update your will is if you have another child, a child you have after your will was created.

Most importantly, if your marriage ends, your estate plan will need to be updated. For example, if you divorce your spouse, you may not want to leave any assets to your ex. This would be a time and situation that you may want to discuss with your attorney; what changes you want to make to your will. You may also want to talk with your lawyer about how to protect your assets should your will be contested.

Another reason to update your will and estate plan is if your relationships have changed. Relationships, over time, change due to how you feel about people in your life. When relationships change or deteriorate, you may want to modify your will to either cut them out or readjust the distribution of property and monies.

In addition, adjustments to your will may need to be made if you move to a different state. Keep in mind; each state in the U.S. has different rules and regulations; especially when it comes to estate taxes and property. It is important, once you move, to consult with a lawyer to ensure that your will is adjusted to your new state and that it is legal.

If you have had important changes made to your assets; especially if you have had an increase or decrease in the value of your estate, you need to update your will and estate plan. Examples of such changes might be, making a large investment and upping the value of your estate or a family member dies and leaves a substantial amount to you.

Or, maybe you change your mind about certain parts of your will. Perhaps there may be some in your life have emotionally turned away from you and your spouse and you want to adjust your will according to how you feel about that person or persons.

When it comes to updating a will, there are two options on how to make it happen; you can revise your will or create a new one. You can set up your own will; however, you may want to consult a lawyer if you have doubts about the content of your will, if you anticipate leaving a substantial amount of money to people not originally listed in your will or if you want to change the executor of the will.

Other reasons why you may want to consult with a lawyer are if you want to make arrangements for long-term care for a loved one, if you fear that someone will contest your will or if you wish to disinherit your spouse.  

“To know the road ahead, ask those coming back” is the famous Chinese proverb although for this article it may be more fitting to say, to know the road ahead, ask those looking back. Everyone has different ideas of what it is like to retire. However, their ideas may be based solely on what they assume or what they have heard. The only way to know for certain is to ask people who have gone through it. Here are several facts and myths that you should learn more about the retirement planning experience.

Boredom

A lot of people assume that boredom is a common occurrence for people without jobs. This is not an issue for those who have their days planned out. Many retirees claim that they have very few boring days. They say that they simply have more time to invest in things that they enjoy doing. Those who are struggling with boredom are encouraged to create their day-to-day schedules and list the activities that they now have time for.

Expenses

Many people worry about the high costs of covering a retirement. They automatically assume that without having a steady income, they will run out of money quickly. However, some retirees claim that their lives have become simpler with fewer responsibilities. They have given up the activities that they did during their workdays and now spend more idle time at home.  Of course, retirement expenses are less of a concern when proper planning takes place.

Work

Retirement does not have to mean no work forever. There are numerous retirees who have taken on part time jobs or gigs to make a supplemental income. They do this to add to their current income or to cover costs for vacations or recreational activities. Other people continue working just to remain occupied. For every retiree, there is a work activity that he or she can do to stay active.

Planning

Planning is a task that few people look forward to about retiring. Without a well-detailed plan, any retirement is not guaranteed to go smoothly. An injury or accident could happen unexpectedly and cause major losses to a person’s budget. People should plan their retirements carefully like they are planning their careers.

Long-Term Process

A retirement does not have to be figured out in a short period of time. You could learn more about planning for a retirement while you are retired. For many retirees, the most helpful experiences are faced firsthand. Do not stop learning about the retirement process before you begin it and remain open to gaining more knowledge through your retirement years.

Health

Declining health is an obvious concern for retired seniors. Young retirees in their 30s or 40s also worry about their health because they are more idle after quitting their jobs. We should be so lucky!  Some retirees are less active and more likely to become lazy or overweight than employed workers. Regardless of age, it’s important that they keep track of their health until the last days of retirement.

Retirement is one of the most unpredictable events in life. Many people plan for years but still face challenges that surprise them. While some people may assume that retirement is boring, some retirees claim that it’s the most exciting period of their lives. It’s important to plan well for the retirement planning experience and make the most from this period in your life.

As with most experiences in life, proper planning can help make your retirement more enjoyable.  We are here to take a second look at your retirement plan or create a plan that helps you achieve your goals.

The reality is that rising interest rates will likely continue through 2018.   This has been choreographed by the Fed Reserve for some time now, and even most of the talking heads on television agree that this is more likely to continue than not.  This begs the question of whether rising interest rates will harm your finances or benefit them. The answer is that they can affect your finances in both ways. A closer look at how interest rates affect you will help you to position your finances for optimal benefits.

The Impact on Your Debts

Interest rates directly impact the cost of your debts. If you have a fixed rate debt, such as is common with a home or a car loan, rising interest rates will not affect these debts until you refinance your home or buy a new car. You also may have adjustable rate debt, such as is common with credit cards and some loans. The rates on these debts will rise as the market rates rise, and this means that your monthly debt payments will increase. If you carry substantial debt with an adjustable rate, you can generally expect your budget to feel burdened. Furthermore, high interest rates can be costlier when you apply for new financing in the future.

The Impact on Your Assets

On the other hand, rising interest rates can be beneficial for you if you have specific types of assets. For example, savings accounts and money market accounts are directly tied to interest rates, and you will benefit from a higher yield on these accounts. CD rates and bond rates generally will improve substantially as well, and this means that you can enjoy a higher yield on relatively safe investments. Stocks and mutual funds may be hit for a short period of time until corporations adjust their finances. Understanding how your assets are tied to interest rates is important if you want to take full advantage of rising rates while minimizing your financial risk.

How to Position Yourself to Benefit From Rising Interest Rates

As you can see, in the most basic sense, rising interest rates benefit your assets and are detrimental to your debts. Make an effort to pay down debt balances. Take out new debt strategically. For example, now may be the time to purchase a home so that you can lock in a low interest rate with a 30-year fixed term. Eliminate adjustable rate debt, if possible. In addition, prepare to take advantage of rising interest rates with strategic CD and bond purchases. You may even invest in rental real estate now. You can lock in a low fixed rate mortgage on your rental property, and you can enjoy the income stream with affordable financing for decades.

Interest rates are a critical component to personal finances. By understanding how interest rates impact your financial well-being and by paying attention to expert insight regarding changes to interest rates, you can better position yourself to improve your financial situation in the years to come.

Play It Safe

As you near retirement your planning should zero in on safer investments in general. The shorter your time horizon until retirement, the less you may want to have riding on things like stocks.

Stocks can be great for building long-term wealth, but they are also risky by nature. They are higher risk and higher reward.  It is when you near the time that you are ready to leave work that you will want to shift into investments that have less risk to them but can still afford you some return on your money. Moving into more guaranteed income vehicles, cash and interest baring accounts could be a better strategy. You may want to avoid risky investments that could leave your nest egg with a lot less money than you had expected to retire with.

Speak With Your Adviser

Understand that a professional financial adviser can help you create a plan that will last through your retirement and achieve your retirement planning goals.  He or she has the ability to really make an impact on your Golden Years.  We are here to help answer your questions as the market and our nations economy changes.

Summer seems to be the time to travel and the best thing about retirement is that you finally have time to travel.  Whether you want to see more of the United States or explore foreign lands, the following list will help you find the perfect adventure.

Go to Europe

Europe is still an attractive destination, offering history and beauty everywhere you look. It is also a very connected place that is easily traveled by rail. You can begin in Tuscany, Italy’s wine country, and continue on to Germany and France, where luxurious hotels and old-world cuisine awaits you. When planning your trip, consider finishing with a shopping spree on London’s famous Bond Street.

Take a Road Trip

If you prefer an old-fashioned road trip, go see the Grand Canyon. While it is often more of a family destination, it still has plenty to offer seniors and is close to Sedona, Arizona, where you will find comfortable accommodations complete with spa treatment at the end of the day. The next leg of your journey can take you to the California coast, known for its beaches and rugged beauty.  Have you ever driven the Pacific Coast Highway?  Breathtaking!  To see even more of America’s wonders, pick up old Route 66 in Los Angeles and drive all the way to Chicago.

Head to Australia

Visiting “down under” is not for the faint of heart because flying to this wild continent takes an average of 18 hours. From the modern form of the Sydney Opera House to the dry heat of the outback, Australia offers a cultural experience like no other. There are wineries, museums, restaurants and ranches to explore, and it is best to set aside at least a month for your visit. It could be one of the best trips you will ever take.

Visit China

After Australia, consider making China your next travel stop. Beijing offers Tienanmen Square and the Forbidden City palace, which was built in the 15th century and housed the Ming and Qing dynasties. Shanghai has hundreds of wonderful restaurants and colonial-era buildings to spend time in. Of course, the Great Wall of China still stands today as one of the world’s most impressive and ambitious feats of architecture. If you are planning to visit China, ensure that you set aside a few days to walk the Great Wall and get a sense of its incredible history.

Enjoy a Cruise

Perhaps you would like to relax and let other people take care of you during your travels. A cruise is the perfect choice for those times when you do not want to drive or constantly fly, walk or take a train. You can stay in a luxurious room, enjoy five-star meals and take in the sights without having to worry about the details. If you prefer a quiet atmosphere, select a cruise that is for seniors only. There are many different cruise trips available to all parts of the world, and you can book your vacation online in minutes.

Retirement means your time is finally your own. Get the best out of your golden years by seeing as much of the world as you can.