How to Maximize Your 401(K)

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Does your employer offer a 401(k) plan? And do they match any of your contributions?

If so, they might only match up to that percentage on each of your checks, and not on how that check amount relates to your total annual salary. 

That means deferring too much, too soon of your salary could reduce the amount of those matching contributions.

Here’s an example of how that could happen:

In 2019, you can contribute up to $19,000 of your salary to a 401(k) plus another $6,000 if you are 50 or older for a potential total of $25,000.

Suppose you are 60, just got a fat bonus from last year or maybe your spouse started a new job that includes a hefty pay increase.

Now you have cash to spare and decide to max out your tax-deductible contributions to your 401(k) within the first six months of the year. Then you’ll have the remaining six months to sock away money for a nice vacation over the holidays.

Let’s assume your salary is $75,000 and you are paid twice a month ($3,125). To reach your goal of front-loading your 401(k) by June 30, you’ll have to contribute $2,083 per pay period ($25,000 ÷ 12). 

And say your employer matches the first 6% of your salary that you contribute each pay period to your retirement plan. That comes to $187.50 ($3,125 x 6%).

Therefore, for the six months you contributed to the plan, your employer put in $2,250.

So far so good. Except for this…

You’ll Miss Out on More Free Money!

The remaining six months of the year you aren’t contributing to your 401(k), which was your goal. But neither is your employer.

Gone is the free money… $2,250 to be exact.

Over many years that can add up, especially when you figure the returns you might earn on those matches. 

However,

You Might Be in Luck…

Your 401(k) could have a true-up match.

This optional feature allows you to receive the maximum employer match even if you’ve reached the maximum deferral amount prior to the end of the year.

In other words, an employer-sponsored retirement plan that has the true-match arrangement doesn’t care when you hit the annual cap.

When Front-Loading Could Make Sense

Without an employer match, front-loading your 401(k) is worth considering since your money will have the opportunity to benefit faster from compounded, tax-free growth.

It could also make sense if you are retiring, as this will be the last opportunity to put away more tax-favored money for your golden years.

And even if you are going to another job that has a retirement plan, there might be a waiting period at your new employer before you can participate. 

Don’t Be Too Eager To Fill Up That 401(K) Bucket Early In The Year

As you can see, there’s no absolute right or wrong answer on whether front-loading is the right choice for you.

Before you do it though, first check with your HR department.

Ask:

  1. What is the match formula?
  2. How often are matches made… per pay period, monthly, quarterly, or annually?
  3. Is there a true-up provision?

Then run the calculations.

If you find that you’re going to fall into a deferring-too-much-too-fast trap that will cost you down the road, simply cut back on the amount you are deferring so it’s spread throughout the year.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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How to Retire Rich Without Social Security

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It’s no secret that our country’s Social Security program is running out of money.

The Social Security system is paying out in benefits more than it’s collecting in tax revenue and as a result they’re dipping into the Social Security trust fund to make up the difference.

If Congress takes no action to fix the problem, starting in 2034 retirees are going to see a 23% cut in social security payments.

Today, the average retiree receives about $1,300 per month from SS. If this massive cut happens, your SS cheque will drop to about $1,000. This will lead to an economic crisis worse than the 1930s depression.

Anyone in their twenties, thirties, heck, even forties might be thinking: “Gee, I feel bad for Dad or Grandpa, but you know it’s not my problem.”

Well the reality is it is your problem. Because Congress will find the money…and you know where they’ll find it? Tax increases on American workers.

What can you do?

The key is to start saving. You have to assume you’re not going to get much help from our government, you’re not going to get much help from your employer, and your financial future is all up to you. And that means you need to save more and save a lot.

The issue is we’re really not good at preparing for retirement. The vast majority of Americans are reaching retirement with around $150,000 saved in their 401(k) plans…for the whole rest of their life. That’s clearly not enough.

Here are some strategies that will allow you to retire rich without having to rely on social security:

Max Out Your 401(k) Match

You can’t rely on your employer to bail out your retirement but if they’re offering to help, then at least make the most of it.

In 2019, the IRS allows those up to age 50 to contribute $19,000 to a 401(k) plan or a similarly structured 403(b) or 457 plan. If you’re older than 50, you can contribute up to $25,000 in 2019.

Most workplaces offer employees the choice of using a traditional plan, which offers an immediate tax deduction or a Roth account, which eliminates a deduction on contributions in exchange for tax-free withdrawals in retirement.

The biggest perk to a 401(k) plan is a lot of employers will match a portion of your contributions. This can be set up in different ways, like a dollar-for-dollar match or a percentage match of contributions up to a certain amount. Take advantage of your employer’s match program, it’s an easy way to boost savings.

Build Your Own Pension Through Tax-Free Savings

Start saving early at the highest percentage you can even if you’ve been putting this off. But don’t let your savings get eaten up by taxes. Minimize what you owe the government by using IRAs, health savings accounts and your employer’s 401(k).

IRAs offer traditional and Roth options, so you can choose to receive tax savings now or in the future.

But contribution limits for IRAs are significantly lower than for 401(k) plans – $6,000 for workers up to age 50 and $7,000 for those 50 and older in 2019.

If you’re eligible for a high-deductible health insurance plan with single coverage, you can contribute $3,500 to an HSA in 2019. With family coverage, you’re looking at contributions up to $7,000.

When you contribute money to these accounts, your money is tax deductible, grows tax-free and can be used tax-free for qualified medical expenses. At age 65, withdrawals can be made from an HSA for any reason and only regular income taxes will apply.

Invest, Invest, Invest

You can’t just save money for retirement and expect it to grow. You need to invest properly. And I don’t mean just putting all your savings into the S&P 500 and hoping for the best.

Index funds that track the market are great, but shouldn’t be your only strategy. If you’re still several years away from retirement, you may want to put your savings in more aggressive growth funds to maximize potential returns.

And if you’re nearing retirement, you might take the opposite approach and diversify your savings into less risky investments. It all depends on your circumstances but leaving your money sit in a savings account earning half a percent is no good.

Find Other Guaranteed Sources of Income

Social Security gives you a steady monthly income, regardless of how the market performs. But an annuity can do the same.

If you’re looking for peace of mind, a variable annuity might be right for you. Payments are fixed though, so if you happen to die prematurely, any extra principal is pocketed by the insurer. But, annuities can be another source of guaranteed income to look into.

Claim What’s Yours, Early

There’s no telling what could happen to Social Security. While the full retirement age is 66, you can begin claiming benefits as young as 62. If you do claim early, you lock in a permanent 30% reduction in benefits.

But with the future of SS in question, it might not be such a bad move to claim as much as possible before the program runs out.

Still, I think it’s unlikely that Congress will let SS collapse by 2035. So it’s best to wait and maximize your SS benefits. If you’re married, you might be able to hedge your bets by having one person claim benefits early and let the other wait.

SS was never meant to replace 100% of your pay at retirement. It was designed to prevent people from going into poverty like in the great depression.

However even though it’s likely not going to disappear, save like it doesn’t exist and you’ll thank me later.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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3 Critical Factors for Your Investing This Year

This post 3 Critical Factors for Your Investing This Year appeared first on Daily Reckoning.

Although the S&P 500 is still up almost 10% year to date, it’s dropped roughly 5.7% in the last month.

So as we approach 2019’s halfway mark, you might be feeling like things are turning a bit and it might not be another “sit back and relax” kind of year… one where things just keep going up on autopilot.

Well, here’s how I look at it…

What Can You Control?

As investors, we should always remember that we CAN’T control the markets, the Fed, geopolitics, or other big-picture forces affecting our portfolios.

At the same time, we CAN control what expectations we have as well as the strategies we use to get where we want to be.

It really boils down to balancing a few important factors:

#1. TIME HORIZON

#2. RATE OF RETURN

#3. RISK UNDERTAKEN

Each of these elements needs to be combined in a way that makes sense for YOU.

For example, if you don’t mind waiting a long time for your wealth to really grow, you can easily get lower, steadier rates of return without taking on lots of risk.

Investing in quality dividend stocks – which I’ve been consistently recommending for two decades now – is a perfect example of this type of balance.

When the Dow jumps 30% in a year, your portfolio still surges in value.

When the market dips or goes sideways, your dividend payments keep flowing into the portfolio or buying you additional shares.

And ultimately, over a decade or two, your nest egg will likely end up having increased something like 10% a year on average.

Buying and Holding Assets

The same can be said for buying and holding other assets for the long-term – whether it’s real estate or precious metals.

In contrast, someone who wants better, faster returns is naturally going to have to take on a little more risk to get it… but even in this market, doing so is not impossible.

One way is targeting various shorter-term moves in various stocks and exchange-traded funds (ETFs).

In fact, you can even use ETFs to target moves in plenty of areas beyond stocks and related investments.

For example, there are widely-known ETFs targeting gold, silver, oil, and other commodities.

There are also ETFs and exchange-traded notes (ETNs) that are designed to rise when stock sectors, indexes, or various commodities fall in value… even some that produce two or three times the moves!

Again, you should expect some losers when you follow a more active approach… but the overall result can still give you a more rapid compounding effect even in choppy markets.

And if shorter-term gains of 5% or 12% still aren’t enough? Then you can simply slide the risk scale a bit further out and use greater amounts of leverage!

Using Leverage Isn’t Always a Bad Idea

Contrary to popular belief, using leverage isn’t always a bad thing nor does it even have to involve borrowed money.

For example, some of the funds I just mentioned use a limited amount of leverage to amplify moves in their underlying benchmarks.

Similarly, buying options to speculate on various up and down moves can do the same thing with even more dramaticeffects… while still never exposing you to unlimited risk like short selling, futures trading, or other leveraged approaches do.

And as I’ve proven over and over again, selling options can also help investors get extra investment income while actually LOWERING their portfolio’s overall risk in many cases!

As the market is dropping, selling put options on companies you wouldn’t mind owning is a terrific way to collect upfront payments while possibly getting you into the type of solid long-term investments I mentioned a moment ago.

Likewise, if you sell some covered calls against stocks you already own, you simply stand to collect extra income on top of any regular dividends you’re already earning.

And as long as you write contracts that have higher strike prices than your entry prices, the worst thing that happens is you book some additional capital gains. 

Bottom Line

Even if the major markets keep falling from here… or bouncing up and down without really going anywhere for the rest of the year… there’s no reason to get frustrated or sit on the sidelines.

You have plenty of ways to continue building your wealth whether you want to stay very conservative… get very aggressive… or split the difference with a more active approach like option selling.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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What to Do if You Are Forced into Early Retirement

This post What to Do if You Are Forced into Early Retirement appeared first on Daily Reckoning.

Will you still be working by age 70?

It’s a fair question.

According to a recent survey by the Employee Benefit Research Institute, nearly one-third of workers predicted they’d be working until age 70 or older, and only 10% expected to retire before 60.

The reality is only 7% of the retirees surveyed worked until at least 70, and more than one third quit work before age 60.

And this wasn’t a fluke scenario either. Corporate downsizing, health problems and other unexpected events have led to more than 50% of U.S. workers, over the age of 50, having to retire earlier than expected.

We tend to think we’re going to work up to, or longer than, traditional retirement age, but it’s not usually the case. In fact, more often than not, older U.S. workers are pushed out of their jobs before their planned retirement date.

Since this is the reality we live in today, I think everyone should have an emergency retirement plan. If you find yourself out of a job unexpectedly, here are some steps you can take to deal with the prospect of early retirement:

Don’t Panic

Being let go or having to take an early retirement package is not always easy to stomach. Your pride might get in the way of your best judgement so don’t make any quick decisions with your money.

Instead, give yourself a few days to collect your thoughts on what just happened.

Review Your Finances

After you’ve taken some time to reflect, start reviewing your finances. Most likely you were planning to continue adding money into your company’s 401(k) or other retirement accounts. Those contributions are likely going to end, so the question becomes: Do you have enough saved to retire?

You can use the 4 percent rule to estimate how much you can safely take out of your retirement accounts. But also be sure to include Social Security and any pension benefits you might have coming your way.

If the numbers look good, then you can safely retire without worry. But if not, you may need to consider part-time work or drastically changing your lifestyle.

Consider Part-time Work Or Consulting

The likelihood of you matching the job you just lost is low, so don’t feel bad about taking a lower paying job or one with less status. Every dollar you earn is one less you’ll have to pull from savings and investments.

Plus, some part-time jobs even offer benefits. Costco and Starbucks, for instance, give part-time staff health insurance and 401(k) plans with company match.

You can also explore the idea of consulting or trying something outside your field of work. Look at early retirement as an opportunity to try something new.

Lower Your Expenses

While you’re on the hunt for new employment, it’s best to tighten up your budget. Searching for work as you get older becomes more difficult and the process can take longer than when you’re young.

Have a look at your monthly expenses and determine which ones are eating up the majority of your household income. For most, housing and transportation will be the biggest culprits.

If you’re single or your spouse is unemployed, you may need to consider some drastic cuts, like selling your house and relocating somewhere more affordable, or selling one of your vehicles to lower expenses like insurance, gas, and maintenance.

File for Unemployment Benefits

If you get laid off, you’re likely eligible for unemployment. You’ve paid into the system all your working life, there’s no shame in taking the benefits now that you actually need them.

You will have to prove that you’re actively looking for re-employment so make sure you follow the necessary steps. And, if you have no income, you might also be eligible for other benefits like food stamps, job training or employment counseling.

Lastly, if you were forced to retire early because of illness, you may also be eligible for disability benefits.

Find New Health Insurance

If you lost your job tomorrow, you can stay on your former employer’s health insurance plan up to 18 months, but you’ll likely have to pay the full cost.

Rather than pay more than you have to, consider applying for new health insurance right away. Since your income will be lower now, you can qualify for subsidies or for Medicaid. These options will most likely be cheaper than the COBRA offered by your employer.

Be Smart About Social Security

If you’re eligible for Social Security benefits, you can start to take them as early as age 62. But, if you do, your monthly benefits will be permanently reduced.

You could lose as much as 30 percent, according to the Social Security Administration, if you collect at 62 rather than waiting until your “normal” retirement age.

What’s more, you can earn “delayed retirement credits” if you postpone your benefits past normal retirement age. Do some research to make sure you’re collecting as much as you possibly can.

Pursue Hobbies

It can be hard adjusting to a life that’s not built around work. So channel your energy into new projects and hobbies that are equally fulfilling.

If you’ve always wanted to spend more time woodworking or gardening, now is the time to do it. And who knows, you might even develop a hobby that will pay you back. A lot of retirees have found ways to make some extra cash buying and selling old antiques, tools, and other usable or collectible items online.

Having to retire early is not always a bad thing. You might get a significant buyout package or you might realize you were ready to retire all along.

Just be prepared for anything and you’ll lessen the shock if the day comes.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post What to Do if You Are Forced into Early Retirement appeared first on Daily Reckoning.

Have You Heard These 10 Must-Know Terms?

This post Have You Heard These 10 Must-Know Terms? appeared first on Daily Reckoning.

According to a recent Empower Retirement survey, 66% of respondents said they don’t understand what “rebalancing investments” means.

A similar percentage, 69%, said they don’t know what “asset allocation” means. And the survey found that millennials in particular find financial terms difficult to understand.

I’d say it’s not just the younger generations struggling to understand today’s financial jargon. I see a lot of soon-to-be retirees with the same distinct dear-in-the-headlights look when pressed about “diversification” and “decumulation.”

Planning for retirement should not be hard to understand. Which is why today I want to demystify a few common financial terms that seem to be tripping up a lot of people. You’ll see a lot of financial experts use these terms to sound smart – really they’re just annoying.

Here’s my top 10 list of financial jargon terms everyone you should know:

1. “Asset Allocation”

This is a term used to talk about how you divide your investment portfolio. How much are you allocating to stocks, bonds, cash, etc.?

Financial planners will often ask you how you want to allocate your assets, they’re essentially asking you how do you want to divide your money.

2. “Decumulation”

I know this sounds like a bad thing — it’s not.

It refers to a phase after years of growing (accumulating) your retirement account, where you begin drawing down your savings to fund your golden years. Essentially it’s a shift from saving to spending and there are lots of opinions and strategies on how to decumlate effectively.

3. “Deleverage”

This is a term that became popular after the financial crisis in 2008.

It simply refers to the concept of paying off debt. When you deleverage, you’re typically selling off assets to pay down your debt.

4. “Diversification”

This term is similar to asset allocation in that we’re talking about putting your money into different baskets. Diversifying your wealth is a strategy used to mitigate risk.

By distributing your wealth into different asset classes, you can lower the chance of losing all your money should one asset class tank.

For instance, if you invest all your money in real estate and house prices crash, you’ll lose your nest egg. Whereas if you invest only a portion into real estate, keep some cash, and invest the rest in stocks and bonds, now your money is diversified and better able to manage the good and bad times.

5. “Equities” and “Fixed Income”

These are really just stocks and bonds.

It annoys me when I hear people tell me their financial advisor has been using these terms instead of simply saying stocks and bonds. It creates unnecessary confusion all for trying to sound smart.

6. “Fee-only” and “Fee-based”

These are terms referring to a financial advisor’s fee structure. The difference is fee-only advisors are paid a flat fee, whether that’s hourly or a percentage of assets managed, and fee-based advisors can accept commission on financial products sold as well as whatever fee structure you negotiate.

This can create the potential for conflicts of interest, so it’s best to avoid fee-based planners.

7. “It Has a Great Story”

This familiar phrase simply refers to how well an investment has performed in the past.

It’s a ridiculous saying but you’re going to hear it a lot.

8. “Risk”

A lot of people associate this with losing money. Risk is really just the chance that your investment will not match your expected return (either positive or negative). If a mutual fund has a 6 percent historical return, and the actual return is 18 percent, that’s the good side of risk.

9. “Tax-Loss Harvesting”

This actually has nothing to do with farming or agriculture. It’s the selling of investments at a loss to lower your tax bill for the year. Most of the time, investors will buy a similar investment as a replacement at a lower price. But all this does is delay the tax penalty.

10. “The Market”

This is a term you probably think you know, but I’m going to challenge you to dig a little deeper next time you hear this term. The market is not singular.

Ask yourself or your financial advisor if you’re talking about the stock market or bond market? S&P 500? U.S. or international? You want the conversation to go deeper than just ‘the market.’ Because you’re not trying to meet or beat ‘the market,’ you’re trying to achieve specific financial goals.

My hope is that some of these definitions clear up the confusion around common financial jargon.

When in doubt, look up what terms mean and don’t be ashamed to ask the person using the jargon in front of you what the heck they’re actually talking about.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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Spending Your Golden Years in a Foreign Country

This post Spending Your Golden Years in a Foreign Country appeared first on Daily Reckoning.

I just got back from a week driving around Baja, Mexico with my wife and daughter, and we had a terrific time.

You might think it’s a little crazy to spend spring break taking a Jeep an hour off the nearest paved road just to find a secluded surf spot but it’s par for the course in our family. Heck last year we were in El Salvador – a country that has one of the highest murder rates in the world – doing pretty much the same thing.

I admit, it’s easy to let the headlines scare you off.

But for me, it is precisely that kind of sensationalism that creates opportunities for savvy travelers.

Spring Break in Baja

In Baja, we stayed in a luxurious house with a clear view of the best surf break in the area for less than I’ve paid at a budget hotel in Florida.

Tacos at the local stand ran $11 for our whole family of three.

In the Valle de Guadalupe wine area, we drank very good local Bordeaux blends for a third of what their French or California equivalents go for.

And a quick look at the local Farmacia would show you ridiculously low prices for some of the same medicines U.S. residents pay a fortune for.

I never felt threatened. It was very easy to get around and communicate with a limited amount of Spanish. The people are super friendly and helpful.

There are plenty of U.S. retirees living in Baja for precisely these reasons. You can literally move one hour across the border from San Diego and get the same basic life for a fraction of the price.

Obviously, that’s not for everyone and you do give up plenty of things in the process.

Travel Opportunities

But I’m telling you all of this because it highlights some of the opportunities that are available outside of the United States … opportunities that can be reached in less than six hours from most major U.S. cities.

So let me ask: Would you ever consider retiring to a foreign country?

I’ve been all around the world – from South Africa to India … many countries in Europe … and throughout much of Latin America. And quite frankly, I could have stayed in just about any of the places I visited for months on end.

More importantly, just about everywhere I’ve been I’ve met fellow Americans who are doing just that – living out their dreams in picturesque towns that most people only see on postcards.

Indeed, more and more U.S. citizens are choosing to live abroad – even if it’s just through VERY extended vacations – so they can stretch their retirement dollars further, gain access to affordable medical care, have new adventures, even hire personal assistants for less than a daily meal at McDonald’s.

Consider Panama, a country I visited back in 2001 …

Panama

There are spectacular and affordable beachfront condos that you can rent for a few hundred bucks a month.

And on the kind of budget that wouldn’t even cover rent here in the U.S., an expat can retire in impressive comfort in Panama, thanks in part to the country’s special Pensionado program.

You’ve probably heard of it – a special program that allows income-earning foreign retirees to obtain indefinite residence in the country plus get a whole host of other benefits including big discounts on movies, concerts, bus fares, medical services, and a whole array of other things.

Or what about Thailand, which I traveled toten years ago …

Thailand

I personally know a number of U.S. citizens who now live there at a fraction of what they spent here.

I’m talking about personal chefs, nightly massages, high-speed Internet connections, and beachfront accommodations for less than renting an apartment in Philadelphia or Kansas City.

Other Places to Consider…

And although it’s still on my “to visit” list, Ecuador also provides an attractive package for American retirees – including discounts on many services plus the ability to participate in the country’s national retirement system for about $60 a month.

I could keep going all day … Nicaragua, Costa Rica, Malaysia, and countless other places that provide bountiful benefits worth exploring.

Heck, I have one friend near retirement who plans on buying a sailboat and spending the first part of his golden years going wherever he wants!

At the end of the day, the point I’m trying to drive home is that increasing income is certainly one way to better your situation no matter what your age. But changing your perspective, cutting costs, and considering less-traveled paths is certainly another – and complementary – way to get the things you want out of life.

So get out there and do some research. You’ll be amazed at what you find. And if you’re already living your dream, don’t hesitate to write in and tell me about it!

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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Your 5 Retirement Options

This post Your 5 Retirement Options appeared first on Daily Reckoning.

It turns out retirement is a relatively new concept. Consider these numbers from The Evolution of Retirement by Dora L. Costa:

  • In 1880, over 75% of men over 64 remained in the workforce.
  • By 1900, that number had dropped to about 65%.
  • By 1950, just 47% of men over 64 continued to work.
  • By 1998, fewer than 20% of men over 64 were in the labor force.

You see, retirement wasn’t always considered desirable. In the 1800s, “mandatory retirement” caused a lot of resentment among older workers and there was a backlash against it.

People wanted to keep working. Work was proof of vitality and productivity. It gave men a sense of purpose and most families needed the money.

However as big corporations grew, they pushed for a younger workforce. Rising wages, private pensions, and social security lead to a flip in the perception of retirement to something more desirable.

In the 1980s, the mandatory retirement policies adopted by law, both officially and unofficially, started to be deemed discriminatory and were abolished.

Today things are even more complex. There are several ways you can retire and each path has its own timeline. Here are the five types of retirement you’ll find in our current economy.

Traditional Retirement

Tell me if this sounds familiar: Get a good job, work hard for forty or fifty years, and then retire around age sixty to enjoy the last decade or two of your life.

During the 20th century, this was considered the standard model of work in the United States. Your retirement was funded through a combination of company pension, personal savings, and government aid.

But by the ‘70s and ‘80s, standards of living had risen enough that some people began to challenge this traditional model. They thought, ‘Why am I waiting until the end to enjoy life?’ There must be a better way.

Early Retirement

This “better way” was early retirement. After running the numbers, employees figured out if you worked hard to increase your income while keeping costs low, you could save enough to stop working at age 50, or 45, even sometimes 40.

What best determines whether or not you can retire early is your saving rate. Traditional retirement requires a saving rate of 10-20%. Early retirement requires you to save nearly half your income — or more.

The more you save and invest, the faster your money can reach what’s called the crossover point — where your income from investments are enough to support your spending. Traditional and early retirement both lead to permanent retirement. But, if you enjoy working, you may want to consider these other three types of retirement.

Temporary Retirement

One of the first books to explore alternative retirement options was Paul Terhorst’s 1988 book, titled Cashing in on the American Dream. Terhorst was an advocate for early retirement, but he also saw another type of retirement, called temporary retirement.

Here’s how he explains it:

We used to work and then retire. [I suggest] you work, then retire, then consider going back to work. Under this plan you devote your middle years to yourself and your family. During those years your mental and physical powers reach their height. You can explore, grow, and invest your time in what’s most important to you. You can enjoy your children while they’re still at home. Later, after you’ve lived the best years for yourself, you can go back to work if you want to. The choice will be up to you.

If you were to follow Terhorst’s plan, you’d go to work for 10-15 years, then take time off to pursue passions and spend time with your family until your money runs out and you have to go back to work.

A lot of early retirees have trouble finding affordable, quality health coverage. One key advantage to temporary retirement is when you return to the workforce later in life, you’ll likely have access to better health insurance.

Semi-Retirement

Temporary retirement was popularized by Bob Clyatt in his 2005 book, Work Less, Live More. What is the difference between semi- and temporary retirement?

Here’s Clyatt:

Semi-retirement is about finding work-life balance. For some, that means continuing with their previous career, but in some sort of reduced capacity. For others, it could mean changing jobs completely to something that pays poorly but offers a sense of satisfaction. And for others, semi-retirement could simply mean supplementing investment income with a carefree job at the local coffee shop or fabric store.

The main advantage to semi-retirement is you get out of the rat race earlier. Even if you’re still working, you have more choices about the kind of work you do. Most people choose jobs or side gigs that are less stressful and more fulfilling.

And because you’ve saved enough that your financial needs aren’t as great, you have the freedom to choose work that pays a bit less.

Mini Retirements

The fifth type of retirement I want to cover is from Tim Ferriss’ 2007 book, The 4-Hour Workweek. Ferriss asks, “Why not take the usual 20-30-year retirement and redistribute it throughout life instead of saving it all for the end?”

With this model, you work on and off as your savings permit. For instance, you might work for five years and then take two years off. You repeat this process over and over again. Hence why they’re called “mini retirements.”

The advantages of taking sabbaticals like this is you get to enjoy retirement and work at every age. The disadvantage is you never amass a lot of savings because you’re constantly spending what you make every few years.

This type of retirement is more geared toward the entrepreneur-type or anyone interested in following an unconventional career path.

Which Type of Retirement Is Right for You?

As you can see, there’s no one right way to retire.

All of the above options offer some advantages and disadvantages. It’s up to you to decide what type of retirement best suits your interests, values, health, and savings.

The good thing is you have lots of options.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post Your 5 Retirement Options appeared first on Daily Reckoning.

Why It’s Dangerous to Contribute too Early to Your 401(k)

This post Why It’s Dangerous to Contribute too Early to Your 401(k) appeared first on Daily Reckoning.

Does your employer offer a 401(k) plan? And do they match any of your contributions? 

If so, they might only match up to that percentage on each of your checks, and not on how that check amount relates to your total annual salary.  

That means deferring too much, too soon of your salary could reduce the amount of those matching contributions. 

Here’s an example of how that could happen:

In 2019, you can contribute up to $19,000 of your salary to a 401(k) plus another $6,000 if you are 50 or older for a potential total of $25,000. 

Suppose you are 60, just got a fat bonus from last year or maybe your spouse started a new job that includes a hefty pay increase. 

Now you have cash to spare and decide to max out your tax-deductible contributions to your 401(k) within the first six months of the year. Then you’ll have the remaining six months to sock away money for a nice vacation over the holidays. 

Let’s assume your salary is $75,000 and you are paid twice a month ($3,125). To reach your goal of front-loading your 401(k) by June 30, you’ll have to contribute $2,083 per pay period ($25,000 ÷ 12).  

And say your employer matches the first 6% of your salary that you contribute each pay period to your retirement plan. That comes to $187.50 ($3,125 x 6%). Therefore, for the six months you contributed to the plan, your employer put in $2,250. 

So far so good. Except for this…

You’ll Miss Out on More Free Money!

The remaining six months of the year you aren’t contributing to your 401(k), which was your goal. But neither is your employer. 

Gone is the free money… $2,250 to be exact. 

Over many years that can add up, especially when you figure the returns you might earn on those matches.  

However,

You Might Be in Luck…

Your 401(k) could have a true-up match. 

This optional feature allows you to receive the maximum employer match even if you’ve reached the maximum deferral amount prior to the end of the year. 

In other words, an employer-sponsored retirement plan that has the true-match arrangement doesn’t care when you hit the annual cap. 

When Front-Loading Could Make Sense

Without an employer match, front-loading your 401(k) is worth considering since your money will have the opportunity to benefit faster from compounded, tax-free growth. 

It could also make sense if you are retiring, as this will be the last opportunity to put away more tax-favored money for your golden years. 

And even if you are going to another job that has a retirement plan, there might be a waiting period at your new employer before you can participate.  

Don’t Be Too Eager To Fill Up That 401(K) Bucket Early In The Year 

As you can see, there’s no absolute right or wrong answer on whether front-loading is the right choice for you. 

Before you do it though, first check with your HR department. 

Ask:

  1. What is the match formula?
  2. How often are matches made… per pay period, monthly, quarterly, or annually?
  3. Is there a true-up provision? 

Then run the calculations. 

If you find that you’re going to fall into a deferring-too-much-too-fast trap that will cost you down the road, simply cut back on the amount you are deferring so it’s spread throughout the year.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post Why It’s Dangerous to Contribute too Early to Your 401(k) appeared first on Daily Reckoning.