Jun 052009
 

Retiring early and having enough money to live comfortably is a dream come true for many! These tips for maximizing are from financial planner Rick Rodgers…he also offers a tax tip about social security income that most people aren’t aware of!

Before the tips, a quip:

“Retirement:  It’s nice to get out of the rat race, but you have to learn to get along with less cheese.” ~ Gene Perret.

With Rodgers’ financial retirement tips, you won’t need to worry about less cheese! For more info on successful retirement, click on How to Retire Happy, Wild, and Free: Retirement Wisdom That You Won’t Get from Your Financial Advisor by Ernie Zelinski. And, read on for Rodgers’ retirement tips…

If You Want to Retire Early – How to Maximize Money for Retirement

How much monthly income do you need to retire?  You should target to replace your current earned income.  I for one don’t want to live on less when I retire!  Look at your current take home pay and annualize it. So, if you are less than five years from retirement, you need to do a detailed budget of what you are currently spending.  Subtract anything that will go away in the next five years; perhaps your mortgage or college tuition will be paid off.  Verify that you target income is still accurate and make adjustments if necessary.

What share of one’s portfolio should be in stocks after retirement?  Many advisors would tell you that this is a function of age, but it’s not. It depends solely on your income needs and anxiety. 

Assume you need $40,000 per year income from your investments.  You will need to have ten years worth of income in bonds = $400,000.  A $1 million retirement savings needs to have a minimum of 40% in bonds in this example.  Secondly, all portfolios need to have at least 20% in stocks to keep pace with inflation.  We’ve now accounted for 60% of this portfolio by blocking out the extremes on each side.  The remaining 40% that is still not accounted for can go either way. 

Stocks have historically had a better return than bonds, but they can be volatile.  This is where the anxiety part of the equation comes in.  Don’t put yourself in a position where you sell your stocks because the market is going down.  You want to be able to ride out the down markets.  Start off with 50/50 in this example and see how you handle the down markets before you increase the stock allocation to 60%.

3 Tips for Saving Money to Retire Early

1. Save your money efficiently. You should have your savings in three types of accounts 1) Pretax accounts, IRAs and 401(k)s; 2) Tax-free accounts, Roth IRAs and Roth 401(k)s and 3) after-tax accounts.  This allows you to structure your income to minimize taxes during retirement.  For details on this strategy, read The New Three-Legged Stool: A Tax Efficient Approach to Retirement Planning.

2.  Don’t take more risk than you need to achieve your financial goals. If you want to retire early, now’s the time to run projections on your income needs and figure out much money you need for retirement.  What rate of return on your investments do you need?  An 8% return can historically be reached with an allocation of 60% stocks and 40% bonds.  But, don’t put 100% in stocks if you only need 60% to reach your goal.

3. Do a detailed budget when you are five years away from retirement. Verify that your retirement income goals are accurate.  I had a client who needed $3,000 per month from his savings to retire.  After the first year of retirement, he was complaining that $3,000 per month wasn’t enough.  It turns out he had been charging a lot of expenses to credit cards through the year while he was working.  He received a large bonus in March from his employer and used this money to pay off the credit card balance.  Our asset values were too far off to make up his shortfall for a sustainable period.  He ended up taking a part-time job so he could maintain his lifestyle.

2 Surprises About Maximizing Money for Retirement

  • Taxes can be a lot lower if you save efficiently for retiring early. You can control your taxable income by choosing where to draw it from.
  • Social Security is taxable if you income is too high. Most people think that social security benefits are not taxed.  That is true if your income is under $25,000 filing as single, or with combined income under $32,000 (if married filing jointly).  Income levels over these amounts could have most of their social security benefits taxed.

If you have any questions or comments about Rodgers’ tips for retiring early, please ask below…

Rick Rodgers, CFP® is an author, keynote speaker, wealth manager and President of Rodgers & Associates, “The Retirement Specialists”, in Lancaster, PA. 

  3 Responses to “If You Want to Retire Early – How to Maximize Money for Retirement”

  1. That’s a great question: do people spend less after they retire? It must depend on their physical and emotional health, recreational habits, hobbies, number of grandchildren, desire to travel…..

    There must be statistics somewhere that shows how spending changes after retirement, for the average American or Canadian.

  2. Jackie – My experience has been that most people do not spend less money in retirement – at least for the first 10 years. Their spending habits change. Now that they have time, they travel more, take care of home repair projects that have been put off, buy and maintain a motor home or a boat, etc. Be sure to take potential changes in your spending habits into consideration when you are budgeting for retirement. You are correct that some of your costs will go down but others, like the ones I’ve mentioned, may go up.

    Your math is just a little off in your calculations. You would need a minimum of $500,000 so that 20% ($100,000) could be in stocks and $400,000 in bonds. I was not saying that you need $1 million to have a retirement income of $40,000. I was trying to explain how someone would go about allocating $1 million in savings if they had an income need of $40,000 per year. I hope my answer clears this up. Thanks for you questions.

  3. Thanks for the article. I don’t understand why Rick Rodgers says someone needs to replace their current income for retirement. Many of my costs will come down once I retire, such as saving for retirement, the costs associated with my children, transportation and commuting costs, clothing allowances, etc. What costs go up other than maybe medical? Also, Rick says that I should have 10 years of my retirement annual income in bonds plus 20% of that value in stocks to keep pace with inflation. So why does he use the $1 million dollar figure in the example? With his example, requiring $40k/year shouldn’t I only need $480,000?

    Thanks.

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