Retiring Early is Only Going to Get Harder

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Retirement

Photo by Tax Credits on Flickr

My neighbor retired from being a corrections officer at the age of 55. That was 30 years ago. He’s still retired and is doing well enough to maintain his lifestyle. However, after asking him how he put his retirement together, I was disappointed in my knowledge that it would be a path I could not follow.

He lives mostly off of his state pension and social security. Not a crazy recipe for those that retired 30 years ago, but they are hardly optimal for me today. The truth is, a lot has and is changing with regards to how people get retirement income and those changes will create challenges for those looking to retire early.

 

State Pension Changes

Private pensions are almost unheard of these days and government pensions are following in their wake. It isn’t a big surprise. State governments have long made promises that they could not keep to their employers. However, as pensions become more restrictive, it is important to note that early retirements are in the legislative crosshairs.

Just last week, the State of Washington passed a reform on state pensions which penalizes early retirement. For those retiring before 62, 55 and 50, the state progressively reduces pension benefits. If you plan to retire early from your State employment, you might need to consider making up for pension losses in your early retirement plan.

Social Security Changes

Just this year Canada changed the age for those looking to collect on the country’s equivalent social security program OAS. They added two years to the benefit age requirements going from age 65 to age 67. If Canada can increase retirement age, so can the US. Especially since raising retirement age is often used as a potential solution in Washington.

Two years probably doesn’t sound like much, but to a young professional starting out, it can be more than you think. Social security benefits are usually adjusted to inflation, so while annual benefits might be an annual benefit of $10-15 thousand today, it could be $40-50 thousand by the time you are retirement age. It’s a large potential loss for those who still have a long way to go for early retirement.

Increasing Taxes

There seems to be one thing both political parties agree on: something needs to be done with deficits, but that something is disconcerting for those seeking early retirement. Politicians on the left and right are talking about new tax structures to raise revenue. The good news is that no one is talking about raising income taxes on the middle class, but the bad news is that other tax raises are being considered.

Most of our retirement incomes are built around the income tax system. We pay income tax on interest and defer tax benefits on Roth IRA plans. However, what happens if several years down the road, government introduces a heavy new VAT, sales tax or carbon tax? Our retirement income which was once taxed through income taxes would now be subject to a second round of taxation be it consumption, production or carbon emissions.

It seems as though this blog’s job is getting more difficult, because retiring early is progressively getting harder.

Understand and Avoiding Student Loan Debt at Retirement Age

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There was a frightening article for future retirees in the Washington Post last week. Some $35 billion in past due student loan debt is owed by those 60 and older. While anyone can fall behind in student loans, it’s important to understand how much student loan debt can ruin your retirement dreams and how those currently struggling found their way into their current predicament.

Sallie Mae Student Loan

Photo by jk5854

Still Paying Loans 30 Years Later!

The problem with tackling our debt is that there are so many loans to deal with. It’s not uncommon for someone to have credit card debt, student loans, a car payment and a mortgage. What debt is worse? What do you pay off first? Credit card debt has the highest interest, but student loans are unforgiveable.

There are those that are retirement age still paying for their education from decades ago and the biggest factor is that student loans are unforgivable. So regardless of what you can or do pay, the interest on student loans is going to accrue until you finally pay them off. Not to mention that government loans have multiple payment options that can extend terms of payment.

What you need to walk away understanding is that if your loan balance is not decreasing every month, you could be paying off the loans for the rest of your life.

Is College a Good Idea Late in Life?

One growing career trend over the last twenty years has been the extinction of lifetime employment. It’s left many seasoned employees out of work, late in life, with credentials lacking an advanced degree, certification or training. For many, the obvious step has been to get up to date on education. While going back to school might be your only viable option, you do need to weigh the risks of student loans.

The biggest thing to remember is that any amount you spend in loans needs to be offset by income. It requires you to take a serious look at what you might be earning after college, how long you want to be working and whether those gains are worth the costs. I hate to be the bearer of bad news, but if you need to go back to school in your late fifties just to retain the income you lost, that trip back to academia is probably not going to be worth the effort.

Picking up the College Tab for Your Grandchild

This really needs to be written across the top of any student loan promissory note:

“When you cosign, the debt is yours, not your progeny’s, and if you do assume payment on this debt, it’ll be a lot more than you thought!”

Here is how this story goes. Grandma cosigns on $20,000 for her gifted granddaughter thinking at worst, $20,000 is no worry. In this case Grandma has vastly underestimated the amount of money she is risking.

Think of it this way. A student can defer loans while interest accrues until they are done with college. This means that if your grandchild takes 6 years to graduate that $20,000 is already several thousand larger. What if your grandchild goes off to graduate school for 2 years? Now interest has accrued for 8 years and hasn’t once needed to make a payment. If the loans are government backed, there will be a 6 month grace period before loans are due.   Then there are several years of potential forbearance and creative payment plans like income-based and graduated that will keep you out of the loop and the loan balance growing.

It’s not out of line to believe you could be on the hook for $60,000 or more by the time the bank comes to you for payment.

Student loans are risky, but less so for young adults who have a long time to make up for them. If you are nearing retirement age, you should avoid student loans if you can and accept them with extreme caution if you can’t, because struggling with student loans once is all it takes to struggle with them forever.

Are You Spending Too Much on Business Expenses?

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With cash flows being down for many small businesses due to the economy, business owners are looking for ways to save on expenses.  However, it can be difficult to know if you’re spending too much on some expenses versus others, or if you can really get a better deal.

As such, here are some tips to see if you’re spending too much on your business expenses.

Business Office Supplies

Photo by 19melissa68

Get a Budget

Take a page out of personal finance and start a budget for your business.  First, you need to make sure that you have specific details on cash outflows, and what the categories of each line of spending are for.  Once you have the categories, you can look at your data from month to month.

Then look at the categories which make up the largest percentages of your spending.  Do categories such as printing and reproduction, office supplies, or utilities seem rather high?  If so, chances are you are spending too much on your expenses.

Ways to Cut Costs

Once you’ve identified your highest expense categories, it’s time to look where you can trim.  The first step is to shop around to see if you can get a better deal on the products and services you normally buy.  The internet is a great place to start.

For printing and office supplies, there are a lot of online retailers that offer these services at very low costs.  See what you’re paying, and try out a few orders through the online company.  You may be surprised at the quality you get for the price.  For regular office supplies, check on Amazon or even office supply stores like Office Depot online. Many times the online prices are more competitive than in store prices.

You can even shop for utilities such as phone service online.  If you have 0800 telephone numbers, there are several sites that let you compare your options for pricing and services for these types of phone lines.  You can also look at VoIP services to see if you can save even more money compared to your local phone company.

About The Baby Boomers Already Flocking to Retirement

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The persistence of our dragging economy has created a lot of concern for baby boomers and their retirement prospects. One concern is that the stock market crash has eaten up a lot of boomers retirement income and forced them to delay leaving the workforce. Another common belief is that boomers are temporarily leaving the workforce during the bad economy and plan to return once things turn around. However, a recent Metlife survey is offering a very different view of boomers and their exodus from the workforce.

Baby Boomers

More Boomers Are Retiring Than Expected

Contrary to the “boomers will be staying to rebuild stock investments” view or the “boomers will be back in a few years” theory, boomers are leaving the workforce en masse and many aren’t planning a return. In fact, the rate of departure, for those 65 and not coming back, has more than doubled in the last few years. In 2008, about 19% were fully retired compared to 45% in 2011.

One Quarter Retired Early for Health Reasons

Of the boomers already collecting social security, almost half retired earlier than planned. Of those, almost another half retired early for health reasons. While everyone hopes to enter retirement healthy, there is a large population of boomers forced into retirement due to illness and health complications. It’s a sobering reality for us younger folk and those in view of their fifties. Health considerations are a necessary consideration for our retirement plans.

One Quarter Retired Late for Budget Complications

If health concerns weren’t enough bad news for your retirement planning, one quarter of retired baby boomers retired later than planned, citing income requirements for day-to-day expenses. This statistic is harder to theorize about. If anything, I tend to think people have a rosy outlook on when they’ll be retiring in the first place. However, another likely culprit could be inflation. It’s easy to know that prices are going to increase over time, but it’s another issue to successfully save and cover those price increases. I’d suggest assuming that inflation will be slightly higher than you think; that might help get you to retirement at the age you plan.

Warm Fuzzy Feelings for Future Social Security Benefits

Nearly two-thirds of boomer retirees are confident in their social security benefits and that those entitlements will be sufficient for their lifetime. While this warm, fuzzy feeling could be naïve, it is a positive finding.

It could be that boomers are confident that politicians will not be seriously curtailing benefits. However, I’d like to think that it is because retirees have sufficient alternative savings to weather potential changes. Either way, boomer outlook on social security seems more solid than I would have expected.

While boomers are starting retirement confident, time will tell whether or not the latest retirement generation was ready to leave the workforce. Until then, learn from the successes and failures of the generations already in retirement and plan your savings to meet those contingencies.