Category Archives: Retirement

The Ideal Amount of Savings at Age 30

The Ideal Amount of Savings at Age 30I love looking really far down the road. I love projecting account balances in the future, and I love the idea of compounding interest.

I also like making money today, I like having the ability to spend money on the things I want, and I have no problem paying a little extra for things if I can afford it. I hate stress, so if a few dollars saves me from worrying, it’s money well spent.

So I thought about, in order to retire comfortably at age 66, I’d need $4 million. Why that much? Because it’s such a huge number, that even with inflation and everything, there’s no way I could ever need more than that. It’s very possible I won’t need that much. But I know that in 40 years, if I have $4 million in savings, there’s no way I won’t have enough money for everything I’ll want.

So working backwards, with an 8% rate of return, I’d need $250,000 in savings by age 30 to hit that mark. If I earn 8% every year, I’d have $367,000 at age 35, $539,000 at age 40, $1.16 million at age 50, $2.5 million at age 60, and just about $4 million at age 66. The “normal” retirement age will probably increase in the next 40 years, so I’ll still be retiring early at age 66.

$250,000 is not an easy target to hit by 30, but the benefits are enormous.

There would be no need to save a dime the rest of your life. Once retirement is fully funded, there’s no need to save extra. As long as you earn as much as you spend, you can spend that money however you want. No more saving 20% for retirement, you can focus on education, the house, travel, or whatever else you’d like.

Instead of saving for huge goals, savings can go toward family vacations, education, and some of life’s pleasures. $250,000 is my goal for 30, and then that extra 20% (or more ideally, 60%) of income that goes to savings can go toward a house or kids.

Readers, what do you think? Is $250,000 a realistic goal? Are the benefits enormous enough to make it worth it?

6 Ways to Make an Early, Penalty-Free Withdrawal From Your Retirement Fund

After years of contributions to your retirement fund, you may need to withdraw money to pay for an expense. Typically, withdrawals made from retirement accounts, e.g. a 401(k) or IRA, made before age 59 ½ are subject to a 10% early withdrawal penalty. There are some instances that you can take money from your retirement fund without having to pay the penalty. You may, however, still be subject to income taxes on the amount you withdrew.

Use it for Medical Expenses

You can withdraw from your retirement fund to pay for medical expenses that aren’t covered or reimbursed by your health insurance company. The total amount of the expense must not exceed 10% of your adjusted gross income and withdrawal must be made in the same year the medical expense occurred.

This exception applies to: Qualified plans like a 401(k), IRA, SEP, SIMPLE IRA, and SARSEP Plans

Pay Health Insurance Premiums After a Job Loss

You can make a penalty-free withdrawal from your IRA to pay health insurance premiums for yourself, your spouse, or dependent children if you lose your job and collect unemployment for 12 consecutive weeks. Unfortunately, this penalty-free withdrawal doesn’t apply to 401(k) plans.

This exception applies to: IRA, SEP, SIMPLE IRA, and SARSEP Plans

Use It for Higher Education Expenses

You’re allowed to use retirement funds to pay for college-related expenses including tuition, fees, and room and board for yourself, your spouse, your children, or grandchildren. (Room and board only qualify for students who are enrolled at least half-time.) The early withdrawal must be used to pay for education expenses at a qualified institution to avoid the penalty.

This exception applies to: IRA, SEP, SIMPLE IRA, and SARSEP Plans

Use it Towards Your First Home Purchase

You can withdraw up to $10,000 ($20,000 for couples) to use toward the purchase of your first home. The home purchase doesn’t have to technically be your “first” home purchase. The IRS only requires that you haven’t owned a home that served as your primary residence within the previous two years.

This exception applies to: IRA, SEP, SIMPLE IRA, and SARSEP Plans

Cover Expenses After a Disability

The IRS allows you to withdraw from your retirement fund without paying a penalty if you’ve suffered “total and permanent disability. You’ll have to provide documentation you’re your physician or insurance company to show you qualify.

This exception applies to: Qualified plans like a 401(k), IRA, SEP, SIMPLE IRA, and SARSEP Plans

Withdraw Any Excess You Paid

The law only allows you to contribute a certain amount to your retirement plan each year. If you mistakenly contribute too much, you can withdraw the excess without penalty. You have until the tax-filing deadline, usually April 15, to withdraw excess contributions from your retirement fund. Otherwise, you face tax penalties.

This exception applies to: Qualified plans like a 401(k)

401(k) Loan as an Alternative

If you need to make an early retirement account withdrawal that doesn’t meet any of the requirements to make a penalty-free withdrawal, you can take a loan against your 401(k) if your employer offers it. A few caveats: you must repay the loan within five years, you miss the opportunity to earn compound interest, and the full balance of the loan may be due if you leave your job before the loan is completely repaid.

Tax Implications

Make sure you consult with a tax professional to completely understand the tax implications of withdrawing from your retirement fund. Keep all your documents and receipts related to withdrawal and usage of the funds in case you need them for your tax return.

7 Money Habits That Will Help You Retire Early

Latest statistics put the average retirement age at 62, but poor money management and student loan debt may push the age further for some people. If you want to retire earlier, you won’t do it by wishing. You’ll have to adopt some critical money management habits if you want to shave a few years off your retirement age.

Save First

Most people pay all their bills and expenses then save what’s left – if there’s anything left to save. If you want to retire early, you have to make saving a priority. Reverse your thinking and put money in savings first, based on a budget of course, then live on what’s left. To make it even easier, set up an automatic savings transfer to occur regularly a day or two after each payday.

Plug Up The Leaks

You’ll be able to save more money if you can cut back on spending and cost of living. Review your spending and identify places where you’re spending money unnecessarily. Cutting back may require more drastic measures like moving into a smaller home or trading for a less expensive home. Not only do spending reductions let you save for early retirement, they also minimize your living expenses and the amount you need to retire early.

Start Saving Early

If you haven’t started saving for retirement, you’re already behind. The longer you wait, the more you’ll have to set aside to reach your retirement savings goal. Don’t wait for some elusive milestone (like paying off debt or getting your next raise) to start saving – do it today.

Avoid Debt Like The Plague

Every dollar you spend on debt is a dollar you could have contributed to your retirement. Paying interest on debt is even worse because you’re paying a cost for the convenience of paying your lender over time instead of all at once. Work aggressively to pay off the debt you already have, then start saving all the money you were putting towards your debt. In the future, save up for big purchases rather than financing with expensive loans or credit cards.

Maximize Your Income

This might mean getting a second job, starting a business, or owning rental property. Or, it could mean advancing in your career, getting promotions and raises. No matter which path you choose, making more money means you have more money to set aside for an early retirement. If you can figure out how to create a reliable stream of passive income, it can serve as a revenue stream that can help you retire earlier.

Live Like You’re A Millionaire

If you think this means you should go on expensive vacations, buy a luxury car, and start wearing designer labels, you’ve been watching too much television. Most millionaires don’t live the lavish lives you see on the big screen – they don’t spend money on things that lose value. Instead, they’re more frugal than not and very disciplined with spending. Reaching your early retirement goal will require the same of you.

Get Professional Help When You Need It

You may not be able to save for an early retirement all on your own. A financial advisor can help you figure out the best way to save and invest so you can reach your goals. Make sure you choose an experienced, licensed advisor who can clearly explain various investment options and strategies to you.