Social Security and Part-time Income. What you should know

These days more Americans than ever before are going to be working past the “traditional” age of retirement. A recent Wells Fargo study of 1000 middle-class Americans showed that nearly 34% of them believe that they’re going to have to work until they reach the tender age of 80 years old.

While this in itself is pretty sour news, the fact is that when you add in part-time income to the Social Security Benefit equation there are a fresh set of tax considerations that have to be kept in mind. For example, if you earn too much you can be pushed into a tax bracket that will cut down on some of your Social Security income and thus on the net gain that you hope to get from working part-time.

One of the first things you need to do is find out what your actual age will need to be before you reach “full retirement age”. Once you reach that age, which is slightly different for everyone depending on the year they were born, you will no longer be subject to the Social Security administration’s “earnings test” since these benefits are not based on your total retirement income but rather on your earnings history.

David Littell, a professor at The American College of Financial Services who teaches retirement planning says that “the whole point of working in retirement is to add to your total income.” He recommends that you figure out exactly how your part-time work will affect your benefits as, from what he says, “you might not benefit tremendously from the combination of work and Social Security benefits.”

He warns that if you have too much professional income, a number that is different for every person, of the 85% of your Social Security benefits could become taxable. Below are a number of other factors that might affect you as a retiree who still working so take a close look at them and, if you have any questions, make sure to talk to your financial  advisor about them ASAP.

  • Regardless of any Social Security benefits that you are already drawing, Social Security taxes will still be taken out of your  current  income.
  • For people that are self-employed they must pay not only the employer but also the employee portion of FICA. The fact that the employer portion is tax-deductible only eases the pain slightly.
  • Keep in mind that some states will tax your Social Security benefits and some will not. The state you live in definitely affects your net profit for many benefits that you’re getting.

If you’re keen on sidestepping some of these problems one of the best ways to do it is to work until you reach 70 and maximize your earnings history. If you do this you can also frontload your encore career income because you can still draw a salary while you are moonlighting. While doing this you can see if your new postretirement career is something that you actually feel will work out for you.

There are certainly a lot more variables that you should know and thus talking to your financial advisor is probably your best bet so that you don’t end up working for nothing or losing any of your Social Security benefits.

What’s the Secret to Early Retirement?

When you ask most people about retiring at 65, many of them will tell you that it’s impossible because they simply don’t have the financial means to do so. The fact is however that it is possible to retire at 65 or even younger and many people have done just that, retiring at an age when the rest of us haven’t even gotten started.

A great example of this is the gentlemen behind the website MrMoneyMustache.com. After just 9 years he was able to retire at age 30 and, while he is certainly the exception to the rule, some of the thoughts and ideas that he has about early retirement can be used by the rest of us to do the same thing.

In order to figure out exactly how it works the best thing to do is take a look at the math. The numbers we’re going to show affect everyone, not just people looking to retire early. Even for people who think that they are too late to retire early the strategies below should help at least to improve their retirement financial situation.

Simply put, the age at which you can retire depends largely upon how much money you can save and how fast. If you’re only able to save the recommended 15% of the amount of money you take home, it will take approximately 45 years to retire if you are counting on a 5% real return after inflation and you live off of only 4% of your savings once you actually do retire.

On the other hand, if you are really committed to retiring early and get put away 30% of what you take home, you can retire in 30 years or 15 years less. Increasing that to 40% you can actually get down to about 20 years and at 50% you can actually start enjoying your “golden years” in even fewer than that.

This isn’t magic it’s basically the result of three separate factors. Of course if you save more the amount of money increases quicker. Secondly, and maybe most important, compound interest will work to your advantage the more money that you have put away. Lastly there is the fact that as your rate of savings increases the money that you need for living expenses decreases.

Now many of you are thinking that saving 30% or more of what you take home is absolutely impossible. While you may think that, the people at “Early Retirement Extreme” and other such websites including Mr. Money Mustache are people who earned more or less an average income but made retiring early a top priority.

Of course every early-retirement story is different and unique but most share a common theme or themes. Most people who have managed to retire early shy away from many of the expenses that the rest of us take for granted including expensive new cars, cable packages and new electronics. They eat out less frequently, purchase clothing on sale or at thrift shops and bike or walk to work. Many also are much more self-sufficient and handle things like home repairs and even car maintenance on their own.

The fact is simply that if extreme saving can help some people to retire at the ripe old age of 30, those very same methods and practices can help people in their 40s and 50s to retire by the age of 65. With retirement fast approaching for millions of baby boomers, and many studies showing that the majority of them are not financially prepared, extreme saving tactics like these may very well be the best (and possibly only) way to prepare.

How Much Do You Actually Need for Retirement?

It might seem rather difficult to determine exactly how much money you need for retirement, as there are so many variables that come into play. However, it’s great to get a start at determining how much money you really need to retire no matter what age you are. Planning for retirement as early as possible is a good way to be prepared for when it comes time to retire. Use these steps to get a pretty good idea of how much money you’ll actually need for retirement.

1.     Calculate a figure of about 75% of your current annual living expenses. While financial planners may argue on the perfect number, you should be able to live off of 75%, or possibly less, of your current income if you do not have any mortgage, rent or housing expenses, work-related expenses, no debt and if your children will all be financially independent. 

2.     Calculate what expenses you will subtract or add in retirement. Keep in mind any expenses you may have or may not have in retirement when compared to pre-retirement. Consider whether you plan on traveling more or less, if you might have any costly medical expenses and if you plan on relocating whether you retire. You should also keep in mind how much money you have already put away for your retirement, such as in a 401(k) account or other retirement planning account and whether you still plan on working once you’ve retired.

3.     Remember inflation. As there is always inflation, you want to keep in mind that the amount of money you use in the beginning of your retirement might be less than you will need to live at that comfort level several years into your retirement. In addition to keeping inflation in mind after retirement, you also need to account for inflation before you retire. If you are not planning to retire for another decade or two, you want to keep in mind how much inflation might increase so you have enough saved up for your retirement.

4.     Expect to live a long life. Plan on living a long life when it comes to thinking about how long you will be in retirement for. It’s always better to have more than enough saved up than not enough, of course.

5.     Keep your heirs in mind.You will likely want to leave something for your children, grandchildren or for charity, so it is important to keep in mind how much you want to leave for them when you begin to calculate how much money you will need for retirement.

6.     Determine your retirement savings. Once you have figured out all of these factors, you can now calculate approximately how much you will need for retirement. You can calculate your retirement savings by hand, use a spreadsheet or even use a retirement calculator found online to help you determine how much money you will need saved to retire comfortably.

Great Tips for Cutting Expenses in Retirement

The average retired person already knows how to live on a fixed income, especially if they’ve been retired for a number of years. One of the most important things that need to be done is simply to lower regular living expenses and, while most people don’t want to give up on the things that they enjoy, in many cases it just means cutting back a little bit and being a little bit smarter with purchase decisions.

With that in mind we put together an excellent blog that will give you great tips for cutting your expenses during retirement so that you can be sure to extend your retirement funds as far as possible. Enjoy.

First let’s take a look at insurance. If you’ve ever joked that you’re “worth more dead than alive” then possibly you’d don’t need life insurance and, if your children are already adults, you probably don’t. Taking a look at your auto and home policies and checking their deductibles is also an excellent idea because, in most cases, you can increase them and lower your premiums by quite a bit. Also, if your children are driving your car and it’s over 5 years old, you can probably drop collision insurance as well. If commuting isn’t a necessity anymore (and if you’re tired, it shouldn’t be) you can probably get by with one car as well.

On to food. Did you know that nearly a quarter of the fresh food that Americans purchase goes to waste? That’s a whole lot of money down the drain and, if you find yourself scraping vegetables and other food into the garbage, you’re part of the problem as well. If you live close to a grocery store you can probably make a few more trips and buy smaller amounts of fresh food each trip so that you only use what you have and very little goes to waste. Leftovers should be put into the fridge or freezer as quickly as possible so that they don’t go bad and, rather than buying all sorts of small water bottles, get yourself a delivery service and 5 gallon bottle that will cost a lot less per gallon.

College tuition can really eat up your retirement funds quickly. If you have children in college you would do well to send them to a state college rather than a private college because it’s going to cost you a heck of a lot less. In most cases the education that they will receive will be just as good (and possibly better) for a lot less money.

Taking vacations when you’re retired might seem like a bit of a luxury but traveling is definitely a present that you want to be able to give yourself for working so hard all those years. Since you’re retired however your time very flexible and you can go on vacation when airfares are cheaper such as during the week or during the off-season. Staying close to home is also a good way to save money especially if you live somewhere that has lots of national parks and other perks. If your children have their own homes you can always visit them as well.

Entertainment can be quite costly but, if you have a library in your town, you can get music, DVD movies, excellent books, magazines, newspapers and other forms of entertainment absolutely free. You’re already paying taxes to support the library so you might as well use it. Since you’re retired, you get a senior discount at all sorts of places like the movies, state parks, national parks and so forth. Take advantage of them and you’ll save some big bucks.

Speaking of entertainment, now that you’re in control of the TV and remote you can cut that premium cable package down to the basics that you like to watch. The same thing with your cell phone service, gym memberships and so forth. Since the kids are out of the house it’s time to get rid of the things that you had for them and put more energy and focus into the things that you care about the most.

If you have a home security system they can be quite costly, and just like your cable company you should shop them around. Just go online and look for affordable home security system packages.

These are some excellent tips that should definitely help you to save money during your “golden years”. If you have any other questions about finances, retirement planning or financial questions in general, please let us know and we’ll get back to you ASAP

The Pros and Cons of working Another Year before Retiring

One of the biggest questions that many retirees have as they approach retirement is whether or not to stop working or to work for another year. Financial experts have even coined a term for this and call it the “work one more year syndrome” as it’s so prevalent. In some cases those nearing retirement go through this syndrome as they fear that their retirement savings won’t last and, unfortunately, in many cases that’s true.

Whether or not you have sufficient funds to retire is one of the main reasons to keep working longer and below you’ll find a number of others as well as some suggestions and advice that will help you to determine whether you should stay in the workforce for another year or get out while the getting’s good. Enjoy.

One thing to consider is adding an income stream during retirement that doesn’t take too much effort. Frankly, there are many who believe that retirement means that they’re going to completely stop any and all of their activities that create income but, in many cases, retirement opens the door to making a bit of income on a side. From investing in real estate and becoming a landlord to turning your hobby into an income generating activity, there are plenty of ways to generate a few bucks to keep from having to take money out of your nest egg and stretch your retirement funds a bit further. If you can do this, you may not need to continue working for that extra year.

By building a reasonable amount of cushion into your plans you may well be able to retire now rather than later, sure, working another year means that your retirement nest egg will be bigger but, if you develop a detailed budget now and identify those areas where you could considerably cut back on spending, you may be able to forgo working at extra year and get started on your retirement now. The fact is, while working longer is certainly a conservative plan for retirement, there are many other plans that work just as well.  You also need to consider where you are storing the cushion.

Understanding how the 4% rule works and creating a plan based on it is definitely a must. While it’s easy to understand that withdrawing 4% annually is generally a sustainable plant, very few people know the actual intricacies behind this financial rule of thumb. Having a clear understanding of how future changes will affect your portfolio, knowing the asset allocation that’s going to be used, as well as knowing how all of these numbers are calculated will help you to determine whether or not retiring now is an option or if working another year is going to be a necessity.

The more flexibility that you have with withdrawals the better chance that you’ll be able to retire sooner than later. The fact is, you can greatly improve the chance that your nest egg will never be depleted simply by keeping track of the market and suspending the inflation increase when they don’t cooperate. This goes against the 4% rule that assumes that a retiree will start withdrawing a fixed amount immediately and then increase their withdrawals by inflation, even if the market goes south. Fortunately this can usually be accomplished by cutting back on some parts of your budget temporarily and, in most cases, you won’t even notice the sacrifice. If you do it right, working an extra year will probably not be a necessity.

The fact is, it’s always best to be optimistic about the future and, even though future returns might not be as good as a used to be, your portfolio will generally do fine as long as you don’t have the unfortunate circumstance of retiring during the same time that the market is going through a significant downturn. If you’re flexible with your spending you can always find another job if this happens but, in most cases, if you’ve done your planning correctly and the market is looking good, retiring now is probably not a bad idea.

The fact is that nobody knows for sure if their retirement nest egg will last them for the rest of their life. With that in mind, taking a few precautions now and, if need be, working an extra year to build that retirement account up may mean the difference between living your retirement in style or not.

By familiarizing yourself with some of the strategies that we’ve gone over above you’ll be able to weather any unforeseen events that occur and, as soon as you hit that wonderful retirement savings goal, you’ll be able to quit your job and start enjoying those golden years if you choose to.