5 More Early Retirement Tips

Dear Rich Lifer,

Early this week we showed you what to look for in an “early retirement” package.

Depending on your age and financial situation, an employer buyout might actually be a blessing in disguise.

However, if retirement is still a few years away, you’ll have to make a decision. Is taking the money and risking your chances in a shaky job market better than staying put and praying you don’t get an email with layoffs in the subject line?

The good news is, you’re not alone in making this tough decision. Today we’re sharing five tips to help navigate your early retirement offer.

This is likely the tip of the iceberg when it comes to early buyouts, as several Fortune 500 companies brace for a second wave of lost revenues due to the coronavirus pandemic.

The truth is, the next crisis could be worse than anything we’ve seen before. (That’s why these two men who predicted the great recession of 2008 are issuing a new urgent prediction.)

If you’re at all worried about getting laid off, these five tips should help you mentally prepare for accepting or rejecting an early exit…

Tip #1: Run The Numbers To See If You Can Stop Working

The first thing you need to do when you receive an offer, is figure out if you’re work-optional or not.

A financial planner can help you run the numbers or you can do some quick back-of-the-envelope math like this:

  • What are your monthly expenses (including taxes)?
  • How much guaranteed monthly income (pension, Social Security, etc.) will you receive?
  • What’s the monthly gap?
  • What’s the annual gap?
  • How big of a nest egg do you need to fund the gap?

Let’s say your monthly expenses work out to $10,000 and your guaranteed monthly income is $4,000, so you have a $6,000 monthly gap or $72,000 annual gap.

If you divide $72,000 by 4%, you get $1.8 million, which is how much money you’d need saved up to retire financially free.

We’re loosely using the 4% rule, which is by no means foolproof. But if your savings are way below the target, you either need to drastically start cutting expenses or start looking for a new job.

Tip #2: Track Your Expenses

Even if you opt out of an early retirement, it’s still wise to get in the habit of tracking all your expenses now.

The reason why this is so important is when you do finally make the leap to retirement, tracking your expenses will no longer be an option. As you saw in the example above, the first number that decides whether you can retire comfortably is your monthly expenses.

The easiest way to find out how much you spend each month is take all your debits from your bank accounts over the last two years and divide that number by 24.

If you bank online, this should take you less than 5 minutes. You’re probably thinking there are some expenses that are outliers, like the kitchen renovation you paid for last year or that new car.

The reason why you should leave those big expenses in your calculation is because there’s always going to be large expenses you have to pay for until the day you die. It’s best to build them into your budget now.

If you’d prefer using an app to track your expenses, Mint or Personal Capital are two good options.

Tip #3: To Take The Lump Sum Or Not? 

One of the hardest decisions you may face — usually because you don’t get a do-over — is whether to take your retirement benefits as a lump sum or as a traditional pension with monthly payouts.

There are four main factors you should consider:

Marital Status: If you’re married and choose to take a pension with a joint-and-survivor payout, payments will continue for as long as one spouse is alive. Financial planners say this is a valuable benefit you shouldn’t overlook.

Even if you don’t expect to live long, your spouse might – and taking a traditional pension can guarantee he or she won’t run out of money.

Your employer’s financial health: It may be tempting to take the lump sum if you think your company is a sinking ship that’s going to drag your pension down with it.

But don’t assume anything until you get your facts straight. Upon receiving your early retirement offer, ask your employer to provide you with a report showing the funding level of its pension.

Your company is legally required to provide this information. If the report shows your company’s pension obligations are funded close to 100%, you should be safe choosing that option if it makes sense for you.

However, if your employer does go under, you have some peace of mind knowing you’re still protected under the Pension Benefit Guaranty Corp. In 2020, the maximum guarantee for a 62-year-old with a single-life annuity is $55,104 a year; it’s $49,596 for a joint-and-survivor annuity.

Other streams of income: If you don’t need the guaranteed stream of income, taking the lump sum and investing it could be the smarter choice. For couples where one spouse is a lot younger and plans to continue working, this can be a great option.

Your tolerance for risk: If you take the lump sum and roll it into an IRA or 401(k), you can invest the money and possibly earn higher returns than you’d get from a pension.

Also, you get the added benefit of leaving any money you don’t spend to your heirs, which isn’t usually the case for traditional pensions.

With a traditional pension, however, your employer bears the investment risk. But since interest rates are so low, you’ll likely get a lower payout for the rest of your life if you take it now. Historically speaking, stocks have provided higher returns.

The downside is you are exposed to more risk during downturns.

But, if you’re concerned about where the market is headed, check out this man’s #1 way to profit from falling stocks – even in a Great Depression.

Tip #4: Avoid Early Withdrawal Penalties 

When you accept a buyout offer and decide to roll the lump sum from your former employer’s 401(k) into an IRA to invest, you need to be careful.

If you’re younger than 59½ and think you might need money from your savings to pay for living expenses, you should leave your money in your 401(k) or other employer-provided plan.

The reason is because when you take a withdrawal from a traditional IRA before age 59½, you’ll usually pay a 10% early-withdrawal penalty.

But if you leave your job at age 55 or older, you can take withdrawals from your former employer’s 401(k) plan penalty-free. You’ll still have to pay taxes but you avoid the 10% penalty.

And if you’re older than 59½, make sure you tell your employer to roll the money directly into an IRA so you can defer taxes until you start taking withdrawals.

Tip #5: Build An Income Plan 

According to the Social Security Administration, more than 50% of Americans take their benefits before full retirement age.

When Social Security was enacted in 1935, the full retirement age was 65. Eighty-five years later, 65 is still considered “normal retirement age.”

It’s common for people to turn on their SS benefits whenever they retire. But, if you have a nest egg you plan to draw down in retirement, you should think twice before claiming your benefits early.

Between your full retirement age and 70, your Social Security income will increase by a guaranteed 8% per year. Generally speaking, you want your fastest growing buckets to be the last streams of income you pull from. These are typically Social Security and Roth IRAs.

Choosing which income streams you draw from first matters. Which is why building a plan for your income can mean the difference between an average retirement and one your friends will envy.

Keep these five tips top of mind should your employer offer you early retirement.

To a richer life,

The Rich Life Roadmap Team

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