Here’s How One Couple Is Achieving Financial Independence Before Age 50

September 08, 2017

One thing I love about working at Financial Finesse is that I have the opportunity to provide financial guidance to folks with a wide range of needs. The majority of my conversations are centered around the specific needs of an individual at a specific point in time — it gives my days a huge variety and I find that every conversation I have is unique.

However, I was recently reminded that while each person and their needs and goals are unique, many of us are in the same situation. It’s how we approach that situation is what leads to differing needs, goals and outcomes. Here’s what I mean.

The situation

I recently spoke with Craig (not his real name), who was looking at ways for he and his wife to maximize retirement plan contributions. Their goal was to save 50% of their income and to be financially independent in the next 5 to 10 years. He is 37 years old now. After assessing his situation, I agreed that they would actually be able to achieve that goal and be completely financially independent before the age of 50. Amazing!

As our conversation concluded, I found myself thinking about how this guy and his wife are doing things right but was also telling myself that their situation is unique and that they are lucky — they both have good paying jobs and could afford to sock away a good chunk of change to meet their goals.

But as I gave it more thought, I realized that their situation was not at all unique. Like may of us, they both went to school, got jobs that paid them fairly, eat 3 meals a day, live in a home and community they enjoy, etc. They weren’t born into money, they were working to accumulate their own savings. What is unique about this couple are their financial goals which translate to different than the “norm” habits and outcomes. So, what can we all learn from their success?

Learning from their success

Decide What Is Important To You. It’s all about prioritization. Craig’s top priority is to save early and often to achieve financial independence at an early age. My guess is, he’s not concerned about keeping up with the Jones’s, nor does he drive a luxury car.

I think you will agree that Craig has probably taken this decision to a bit of an extreme (not everyone can achieve financial independence by their mid 40’s), but we can all set realistic long term goals and adjust our spending and lifestyle behaviors to achieve these goals.

Making a small shift: Set a goal to retire one year earlier than originally planned. Then, cut out something that’s not as important to you as retiring earlier and apply the savings towards retirement.

Plan Early And Often. Rome was not built in a day. When I talked with Craig, it was clear he had been working consistently towards meeting his goal for a long time. My bet is that virtually every financial decision he’s made since his early 20’s has been influenced by his long-term goal. Again, he may be taking this to an extreme, but if you have a long-term vision, set the goal and work to achieve it, you may surprise yourself on what you can accomplish.

Making a small shift: Answer this question: what do you want to be different in your life 10 years from now? What small action can you take today to take a step toward that change?

Live Below Your Means. Craig and his wife most certainly live in a smaller home than they could afford to buy based on their income. If the bank says you can afford a $350,000 mortgage, that does not necessarily mean it would be a good financial decision for you. Consider what that larger mortgage payment would do to your day to day life style.

Look at it this way, if you had chosen a lower-priced home and reduced your 30-year mortgage payment by $100 per month, and instead directed that $100 to your 401(k) over the 30 years of your mortgage, you would have increased your retirement savings by $100,000 (assuming an annual return on 6%).  That’s real money that could allow you to achieve your financial independence sooner that you think!

Making a small shift: Maybe you can’t move to a home that’s $100 less per month or maybe you don’t have 30 years to save, but what other areas can you cut back so that you can find an extra $100? Use this calculator to see the impact of finding just an extra $3 per day to put away.

The key takeaway from Craig’s story is that if achieving financial independence is THE most important thing to you, it’s entirely possible. You just have to be willing to make some tough choices in order to get there.

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What Are Your Health Insurance Options When Retiring Early?

February 20, 2017

Are you considering retiring before age 65 but worried you could lose your access to health insurance due to the new administration’s promise to repeal the Affordable Care Act? There’s a lot up in the air right now, and it’s going to take some time to play out in Congress. Health insurance is expensive, and health care costs are likely to comprise a large chunk of your retirement spending.

Up until now, if you are like most Americans, you have participated in a group health plan with your employer subsidizing the cost. With family coverage, the typical full cost of coverage is over $18,000 per year. If you retire early, you’ll need to find and pay for new health care coverage until you are age 65 and can participate in Medicare. Here are some strategies for making wise decisions in the face of increasing uncertainty about health insurance access and costs.

Don’t Panic

It may feel like the earth is being demolished to make room for an intergalactic freeway, but don’t panic.  The health insurance landscape could look a lot different next year than it does now – or it may not. We don’t know very much for sure except that there is uncertainty.

Under those circumstances, it’s helpful to plan for multiple scenarios: health insurance costs more and/or is harder to obtain, waiting periods for pre-existing conditions could be reinstated, or the major provisions of the ACA are not repealed. Prepare an early retirement budget which reflects your projected health insurance costs under each of these scenarios. Remember – you only need to model the changes through age 65, when Medicare kicks in.

Build up your HSA – and don’t spend it

If you are currently covered by a high deductible health plan (HDHP) with a health savings account (HSA), build up your balance as much as you can. Contribute the maximum to your HSA between now and your retirement date. Those with individual coverage can contribute a maximum of $3,400 and those with family coverage can contribute a maximum of $6,750 for 2017. If you are 55 or older, you may contribute an additional $1,000.

Once you’ve contributed those funds, if possible – don’t spend them. Use other available cash reserves to pay for your routine expenses up to the deductible. After you have built a balance greater than your out-of-pocket maximum for the year, consider investing the remainder.

For those retiring early, keep as much of your HSA balance as possible to pay for eligible medical expenses after you retire, including COBRA premiums (see below) as an early retiree and Medicare Parts B, D and Medicare Advantage after age 65. For IRS guidelines on HSAs see here. For more ideas on maximizing your HSA see here.

Increase your cash reserves

The years leading up to an early retirement are a great time to power up your cash reserves.  Work towards building short term liquid savings such as a savings account, money market fund, short duration CDs or Treasury Bills equal to several years’ worth of projected maximum out-of-pocket health care costs.

Look for part-time work with access to health care benefits

Many early retirees have discovered that the key to managing health care costs in retirement is to work part-time. Ask yourself if it makes sense to look for part-time work through age 65, either with your existing company or another, such as these companies who offer insurance coverage to their part-time employees. You will probably have to cover all or most of the cost of your health insurance. However, participation in a group plan may offer more comprehensive coverage. It also isn’t going to hurt to have some extra money coming in the door during the early retirement years to help pay health care costs.

Consider COBRA

When you retire, you may continue your group coverage under COBRA for 18 months, paying the full premium yourself (or with retiree health plan dollars if you are fortunate enough to have a retiree health plan). As mentioned above, if you have funds in your health savings account (HSA), you can use them to pay for insurance premiums for health care continuation coverage through COBRA. Your coverage continues during the same period, and you won’t have to change providers or get used to a new procedure for submitting claims. Be aware: there will be some sticker shock as you begin to pay the entire cost of your health insurance premium.

If you have a pre-existing condition and are retiring within 18 months of when you’ll be 65, COBRA is likely to be your best option in this age of uncertainty.  As long as you pay your premiums, you’ll remain covered up until you’re eligible for Medicare. Even if you don’t have a pre-existing condition, choosing COBRA still gives you a little breathing room to figure out your next steps for insurance once it’s clear what happens to the ACA.

Price coverage on the private market

If you are in good health, consider pricing your options in the private insurance marketplace. The younger your early retirement begins, the more it could make sense to shop around for the right insurance. The private market offers a wider range of options. Compare plans and prices by using online marketplaces such as ehealthinsurance.com or gohealthinsurance.com or working directly with an insurance broker. Even if you are considering coverage under COBRA or the Affordable Care Act, it’s a good idea to shop around and compare.

Take your chances now with the ACA

The Affordable Care Act is still the current law and the infrastructure which allows consumers to buy insurance is still firmly in place. If you are planning to retire soon, you may consider applying for coverage under the ACA and comparing plans to COBRA and what you found through the private market. Even if you retire outside of the open enrollment period, losing your employer-provided coverage is a qualifying event. Start at Healthcare.gov to see what is available in your state.

Depending on your new family income after early retirement, you may qualify for a subsidy of your insurance premiums. However, that is something which could change quickly, so it’s best not to count on it. In any case, you cannot be turned down for coverage. There are many advantages to the ACA for early retirees if the law remains the same or amended: cost savings, universal access, subsidies for lower income participants, etc. The biggest disadvantage right now for early retirees in buying insurance is not knowing whether the same or similar coverage will be available if the law is repealed.

In conclusion, for those considering early retirement, the uncertainty about what’s going to happen to the Affordable Care Act has added a layer of complexity to pre-retirement preparations. For some employees, they may decide it’s best to delay their planned early retirements until there is more clarity about what happens next. For others, they may choose to forge ahead, hopefully with bigger balances in their HSAs and savings accounts to help manage the risk that comes along with this uncertainty. If you have strong opinions about the ACA and what Congress and the President should do next, you can find information about how to contact them here.

 

Do you have a question you’d like answered in this column? Please email me at [email protected]. You can follow me on our Financial Finesse blog by signing up here, and on Twitter@cynthiameyer_FF.

What I Learned From an Early Retirement Package

November 11, 2016

Over the last few weeks, I have been having a whole lot of conversations about retirement with employees of one of our client companies. They are offering an early retirement package (ERP) to a fairly large number of employees, and they have a fairly short window of time in which to make a decision about accepting it or declining the offer. When retirement is no longer something that has a long term time horizon and is suddenly presented as an immediate opportunity, what is important suddenly becomes crystal clear, and that is slightly different for each person.

I have been able to make some observations on the factors that have driven the decision for most of the candidates for the ERP. It isn’t hugely surprising, but these factors are helping people make one of the most important decisions of their lives. So let’s learn from them so that we can be in a great position to make our retirement decisions with a clear head and on our own time lines. Here’s what I’ve found over the last several weeks:

People with very low levels of debt are much more likely to be able to accept the ERP. The people I met who have paid their mortgage off are, with an almost unanimous vote, accepting the offer and moving on to the next phase of life.

What I learned: I want to pay my mortgage off ASAP! Any debt should be eliminated quickly and you’ll be in a better position over the long haul. When all debt is gone, your embedded cost of living is lower for the rest of your life. That can do nothing but extend the life of your asset base.

The cost of health insurance in the future was a factor in everyone’s decision. Some had a spouse who could cover them or had the ability to roll into Medicare. Others are going to price policies on the exchanges or with affinity groups or simply price policies on a few insurer websites. Those with a clear plan for how to handle the cost of insurance had a very good likelihood of accepting the ERP.

What I learned: In order to prepare for medical costs in the future, I’m planning to max out my HSA annually and invest the account for long term growth, while paying most medical costs out-of-pocket. I plan to keep abreast of the ever-changing landscape of health insurance as well. Recently, we saw significant increases in premiums for health insurance in the exchanges so being aware of the landscape is always a best practice.

The folks who were confident in their ability to land another job before the severance package ran out were also much more likely to accept the offer. With a relatively generous severance package, those who could get jobs relatively quickly could “double dip” for a while. With income from two jobs, they can work on paying debt off or invest a sizable portion of their income.

What I learned: Having an updated resume and refreshing your LinkedIn profile periodically is always a best practice. One never knows when the employment market will turn into the next batch of good (or bad) news, so being prepared at all times is a very worthy endeavor. Keep your contacts organized. Stay in touch with former coworkers, as well as current ones. Use your internal network to help find opportunities.

The lessons I learned over the last few weeks will provide more benefits to me than the benefits I provided to the individual employees. I will consider all of these factors and work to make sure that when the time comes for me to consider retiring, I have all of my I’s dotted and T’s crossed. You should too.

 

 

How to Evaluate an Early Retirement Offer

November 07, 2016

You’ve received an offer from your employer with financial incentives to retire early. You’ve got to admit you’re intrigued. Should you consider accepting it? Before you say “yes” or “no,” ask yourself these questions:

Am I ready to leave?

Before running any numbers, be honest with yourself. When you received the offer of early retirement incentives, were you excited, somewhat interested or depressed? The more interested you are emotionally in moving on, the less likely you will regret your decision if you decide to accept the offer.

It’s also important to assess the state of the company. If you decide to stay, are there any reasons your job might be in jeopardy in the near future? Be clear-eyed about all the possibilities, and factor them into your decision.

Can I afford to completely retire now?

Run a retirement calculator to see if you could retire now, based on what you’ve saved so far and your estimated income from Social Security and any pensions and/or other investments.  Make sure you run the worst case scenario, not just the best case scenario. For example, model scenarios assuming a 2% return, a 4% return and a 6% return, and consider running the scenarios through ages 85, 90 and even 100. If the model shows you can retire with a reasonable lifestyle, keep pace with inflation and not run out of money in old age, you will feel more comfortable that you are ready.

What will I do for health insurance?

Health insurance is expensive. Up until now, you’ve participated in a group health plan, with your employer picking up a large part of the cost. If you have family coverage, the typical full cost of coverage is $17,500 per year. If you accept the offer, you’ll need to find and pay for new health care coverage until you are age 65 and can participate in Medicare. Review your options:

  • Continue your group coverage under COBRA for 18 months. You would pay the full premium yourself (or with retiree health plan dollars if you are fortunate enough to have one). If you have funds in your health savings account (HSA), you can use them to pay for insurance premiums for health care continuation coverage through COBRA.
  • Get coverage from your spouse’s employer-sponsored plan, if applicable. A spouse losing their coverage is a  qualifying event and they will be able to add you to their insurance.
  • Seek coverage under the Affordable Care Act. Even if you retire outside of the open enrollment period, losing your employer-provided coverage is a qualifying event. Start at healthcare.gov to see what is available in your state. Depending on your new family income after early retirement, you may qualify for a subsidy of your insurance premiums. In any case, you cannot be turned down for coverage.
  • Look for coverage on the private market. An insurance broker or online marketplaces such as eHealth or GoHealth are helpful places to start comparing plans and prices. Even if you are considering coverage under the Affordable Care Act, it’s a good idea to shop around and compare.

When will I claim Social Security?

The earliest eligible retirees can claim Social Security benefits is age 62. Most workers receiving early retirement incentive offers now would not be eligible for full Social Security benefits until age 66 to 67, depending on current age. If you claim early, benefits will be reduced based on the longer payout period.  Delaying Social Security to full retirement age or even as late as age 70 will increase your monthly benefits.  Factors to consider include:

  • Will you need the money? If you will need the income to make ends meet, you have your answer. However, if you can get by with some additional income from part time work, you’ll be able to receive higher monthly benefits by delaying claiming Social Security.
  • Is your spouse still working or do you anticipate any employment income? If your spouse is still working, you’ll be taxed at their marginal tax rate on your Social Security benefits. Plus, if your family earnings exceeds $15,720 for 2016, you’ll lose $1 for every $2 you earn above the limit. (Note that the benefit isn’t truly lost. You’ll be able to recoup that once you hit full retirement age).
  • How’s your health? If you have health issues, you may decide to take Social Security early. If you don’t, delaying may make more sense.
  • Do you have longevity in your family? Do you have someone in your immediate family who lived to 95 or 100? If folks in your family generally live long lives, consider delaying Social Security benefits
  • Do you have other assets you can tap? Does it make sense to tap your 401(k), pension, Roth IRA or brokerage accounts first? Model different scenarios to see which offers you the highest total lifestyle in retirement.

As you can see, there are a lot of factors to consider in deciding whether to take an early retirement offer. There is no right or wrong answer for everyone. Just make sure yours is an educated one.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

What Happens Now If You Cannot Afford Health Insurance?

November 18, 2013

Most of the employees that I work with are in a fortunate position to work for large companies that provide health insurance to their employees.  But many of the people that I talk with have friends and extended family members that are not covered by an employer-provided plan.  One area of confusion these days is what happens when you cannot afford health insurance.  Unfortunately, the answer to that question is a little complicated and it depends on a few important factors. Continue reading “What Happens Now If You Cannot Afford Health Insurance?”

Getting Back to Basics

November 08, 2013

I grew up playing sports almost year-round.  When I was 6, I started playing football.  I played some sport competitively all the way through college and for many years afterward. (I’m currently debating whether or not to become a referee in a local youth rugby league so that I can still get out there and run around a field, but not wake up stiff and sore from being tackled.) Continue reading “Getting Back to Basics”

5 More Ways to Boost Your Retirement Savings and Retire Early

November 12, 2012

It’s not so much how much you make; it’s what you do with what you make that can help you create wealth. Case in point, a friend of mine just retired at age 53.  In today’s economy, retiring early is tough to do – virtually impossible—yet she did it and her husband has never had a “regular job.”  She worked as an administrative assistant at the University of California in Davis, California.  Without a college degree, she never earned six figures but what she did earn, she and her husband saved.  They were very frugal and what they saved they invested in rental property, which he managed, as well as in her 401(k).  I love reading her recent Facebook posts sharing things like “It’s a rainy day and I don’t have to go into work!”  She and her husband achieved financial freedom and so can you. Continue reading “5 More Ways to Boost Your Retirement Savings and Retire Early”

Is Your Work Really Fulfilling?

September 19, 2012

Saving money isn’t easy, and every now and then I need to remind myself why I do it.   I watched the national political conventions a few weeks ago and heard a lot of speakers talk about the “dignity” you feel from having a job as though the mere act of doing work provides personal fulfillment.   I am deeply sympathetic to the millions of American struggling to find work in order to pay bills and to those who need every dollar they earn just to make ends meet. At the same time however, almost every day I meet people who tell me how much they don’t like their job or don’t like going to work.  I find no dignity, only profound sadness, in thinking that most people will probably spend day in, day out, for most of their lives doing something they really dislike, dreaming instead about doing something else. Continue reading “Is Your Work Really Fulfilling?”

You Can Retire at 60!

April 23, 2012

She proved me wrong.  When my first appointment of the day for a work site personal financial planning session came in, I was skeptical because the first thing she said was that she wanted to retire in six months and she was sixty years old.  I raised an eyebrow and told her, “It’s not easy to retire at sixty – in fact it is really tough. Not many people do it these days.” Continue reading “You Can Retire at 60!”

Learning to Become an Extreme Saver – Part 1

April 12, 2012

We’ve all heard about the many benefits of saving money.  With money in the bank, you can pay for things you need or want without going into debt.  You have an emergency fund to help tide you over in case you lose your job and you have the foundation for a nest egg that can be invested conservatively and grow over time into a substantial amount saved for retirement.  There’s no question that being a saver has several advantages.  But have you ever thought about the advantages of becoming an ‘extreme saver’? Continue reading “Learning to Become an Extreme Saver – Part 1”

How to Plan for an Extreme Early Retirement

February 02, 2012

My most popular blog post (and the most popular one on our whole blog) called “How to Be Financially Independent in 5 Years (No Matter What Age You Are)” was about a concept called “Early Retirement Extreme” in which people save very large percentages of their income to be financially independent before they even turn 40. For example, if you save 75% of your take-home pay and earn a 5% real rate of return, you would have enough savings in just 5 years to maintain that standard of living for the rest of your life (assuming a standard 4% safe withdrawal rate of your initial savings amount and adjusted each year for inflation). While this would probably not be realistic for most people, the more you can save, the sooner you can be financially independent to use your time as you see fit. (The author of the blog that inspired my post actually ended up going back to work but out of enjoyment rather than financial necessity.) But in addition to the challenge of living on much less income than we’re used to, there are some other considerations facing anyone looking to retire extremely early: Continue reading “How to Plan for an Extreme Early Retirement”

What Would You Do With 19 More Hours of Free Time During the Week?

January 31, 2012

That’s the question I asked myself after recently reading an article suggesting that we shorten the standard work week from 40 hours to 21. With nineteen more hours during the week, I know there would be a lot more things I would do.  I’d spend more time outdoors, enjoying fresh air and walks in the park.  I’d learn new skills, like a new language and woodworking.  And I’d spend more time with my family and friends, the people that make life worth living. Whatever you can imagine doing with more free time, it’s likely something that would make your life better and happier. Continue reading “What Would You Do With 19 More Hours of Free Time During the Week?”

Things to Consider if You Were Offered an Early Retirement Incentive Package

September 09, 2011

Last week I talked about some of the biggest factors that people face when considering an early retirement package.  Health insurance issues and determining when to take Social Security were by far the 2 most common topics of conversation.  But, they were by no means the only topics of conversation. Continue reading “Things to Consider if You Were Offered an Early Retirement Incentive Package”

Things to Consider if You Were Offered an Early Retirement Incentive Package

September 02, 2011

Over the last month, most of my working hours have been spent talking to people about the reality of deciding, in a short time window, if they are going to retire in the next several months.  Why?  These people have all been offered an early retirement incentive package with a deadline for accepting or rejecting the offer.  This meant that, for them, retirement was no longer something that was “out there in the future.”  It became a “right here, right now” opportunity.  There were things I learned during that process, and over the next 2 weeks I’ll talk about the “universal” factors.  Each person had their own story, their own situation, and their own set of circumstances that was remarkably different than anyone else’s.  But, there were some factors that were important to every single person I met.  They all asked about several factors that would impact the rest of their lives.  Here are the first few factors (more to come next week): Continue reading “Things to Consider if You Were Offered an Early Retirement Incentive Package”

Making the Decision: Which Pension Payout Option is Best?

August 30, 2011

I recently met with a multitude of pre-retirees for individual consultations who were contemplating an early retirement deal, so naturally part of the analysis revolved around their pension.  I was stunned at the amount of employees who, up until our in person meeting, had never gone online to run a pension estimate.  Of those who had already run their estimate, quite a few were still unclear about the various payout options and how to go about making the decision on which payout best fit their own situation.  The most common question I got was, “What do most employees pick?”  Although I was very tempted to bring up the old adage mom used to say that, “if everyone else jumped off a bridge, would you do that, too?”  I resisted, and instead, I stressed to them that it was a personal decision based on their own unique situation.  Here are the points I had the employees consider: Continue reading “Making the Decision: Which Pension Payout Option is Best?”

Real Life Cases of Money Isn’t Everything

August 26, 2011

Over the last month, I’ve had the opportunity to meet a lot of people who are contemplating retirement right now.  And I’ve noticed a common theme.  More people, than might be expected, really like their job and the people they work with, and they have a difficult time wrestling with the emotions of making the retirement decision.  A little background to this story might help. Continue reading “Real Life Cases of Money Isn’t Everything”

Early Retirement Buyouts: A Good Idea for Who?

March 08, 2011

A school district in Minnesota recently announced an early retirement incentive program to entice their most senior (and highly paid) teachers to retire in order to replace them with less experienced teachers with lower salaries.  The program has an interesting twist – if at least 10 teachers take the buyout, each will receive $15,000 but if at least 15 accept, then they will each receive $20,000.  I can imagine a bit of peer pressure will be felt by those teachers who are on the fence about taking the bait.

How do I know these details?  One of the teachers eligible for this early retirement incentive attended a workshop I was facilitating at her husband’s place of employment, where I happened to be discussing details on Retiree Medical and Medicare coverage (which happens to be next week’s subject I’ll cover). Continue reading “Early Retirement Buyouts: A Good Idea for Who?”

Financial Education in the Workplace: What a Difference a Few Years Make

January 04, 2011

I recently spent a few cold, snowy days meeting with employees in the Midwest counseling each of them regarding their retirement goals.  I was surprised to hear quite a few employees were planning on early retirement, especially since we hear the trend is just the opposite because of our current economy.  Continue reading “Financial Education in the Workplace: What a Difference a Few Years Make”